Valtech Completes a Valuation of Additional Tier-1 (AT1) Perpetual Bonds

Valuation of AT1 Perpetual Bonds

At Valtech Valuation Advisory Limited, we recently completed a sophisticated valuation of an Additional Tier-1 (AT1) perpetual bond to meet the accounting and reporting requirements of a private fund client. This project underscores our expertise in navigating the complexities of innovative financial instruments, delivering tailored valuation solutions that drive informed decision-making.

AT1 bonds are distinctive hybrid securities designed to bolster the financial resilience of issuing institutions, particularly banks, in the wake of the 2008 global financial crisis. These high-yield, high-risk instruments are structured to absorb capital losses under specific adverse conditions, such as when a bank’s capital ratio falls below a predetermined threshold. Unlike traditional convertible bonds, AT1 bonds lack a fixed maturity date, and their interest payments are contingent upon the issuer’s capital adequacy. Additionally, features like resettable interest rate mechanisms and potential conversion to equity or write-down provisions add layers of complexity to their valuation.

Valuing AT1 perpetual bonds demands a nuanced methodology that accounts for their unique characteristics. At Valtech, we developed a robust valuation framework by integrating the following approaches:

1. Income Approach: We employed advanced discounted cash flow (DCF) models, carefully calibrating assumptions to reflect the bond’s perpetual nature and conditional interest payments. Special attention was given to the resettable interest mechanism, ensuring that projected cash flows aligned with the bond’s contractual terms and the issuer’s financial health.
2. Market Approach: To validate our valuation, we conducted extensive market research, analyzing the trading price movements of comparable AT1 bonds in the secondary market. By benchmarking against market norms and identifying pricing trends, we established a reasonable valuation range that grounded our analysis in real-world data.

By synthesizing insights from the income and market approaches, we delivered a well-supported valuation that met our client’s accounting and reporting needs. Our rigorous methodology ensured transparency and defensibility, providing our client with confidence in the reported value of their AT1 bond holdings. The final deliverable included a detailed report outlining our assumptions, methodologies, and market insights, tailored to facilitate compliance with financial reporting standards.