Alinma Bank's 6.5% AT1 Certificates: A High-Risk, High-Reward Play in Rising Rates

In a world where central banks are hiking rates to combat inflation, income-seeking investors are scrambling for yield. Enter Alinma Bank’s Sustainable AT1 Certificates, offering a 6.5% annual coupon in a landscape where 10-year U.S. Treasuries hover around 4.5%. But beneath the allure of this premium payout lies a labyrinth of structural risks—from coupon deferral triggers to liquidity challenges—that demand scrutiny. For those willing to navigate this minefield, Alinma’s offering could be a tactical gem. Let’s dissect the opportunity.

The Lure of 6.5%: Why This Certificate Stands Out

The 6.5% fixed coupon is the headline grabber here. In a rising rate environment, this yield outperforms most sovereign debt and corporate bonds, making it a magnet for income-focused investors. The certificates are perpetual instruments, meaning they have no maturity date—ideal for those seeking long-term cash flow. However, Alinma retains a call feature exercisable after 5.5 years, allowing redemption as early as 2030. This dual structure—high yield with a potential exit for the issuer—creates a compelling tension between reward and risk.

The Double-Edged Sword of Perpetual Debt

Perpetual instruments like AT1s are inherently risky. While their lack of a maturity date means no principal repayment pressure, they come with deferral triggers that could suspend coupon payments. The Offering Circular ties these triggers to Alinma’s Common Equity Tier 1 (CET1) ratio, though the exact threshold (e.g., 7%) remains undisclosed. This opacity is a red flag: if the bank’s capital buffers weaken, investors could face sudden income gaps.

While Alinma’s 172.26% NPL coverage ratio and 18.8% ROE (2024) suggest robust financial health, investors must remember: past performance ≠ future results. A downturn in oil-dependent Saudi Arabia’s economy or a spike in non-performing loans could pressure capital ratios. Pair this with the USD denomination, exposing non-U.S. investors to currency fluctuations, and the risks multiply.

Structural Risks: The Fine Print That Could Sink Your Returns

1. Coupon Deferrals: The lack of clarity on CET1 thresholds means investors must rely on faith in Alinma’s management. If capital buffers shrink, deferrals could occur, leaving investors scrambling to reinvest in a higher-rate world.
2. Liquidity Traps: Perpetual instruments often struggle in secondary markets. With a minimum subscription of $200,000, retail investors may find themselves locked in until redemption—assuming the bank calls the certificates.
3. Regulatory Whiplash: Basel III rules could evolve, altering the terms of AT1s. Investors must monitor global regulatory shifts closely.

Why This Could Still Be a Winner

• Alinma’s Strength: Its 172.26% NPL coverage is a fortress against defaults, and an 18.8% ROE signals efficient capital use. The bank’s Sukuk-compliant structure and London Stock Exchange listing add credibility.
• Rising Rates = Higher Reinvestment Risk: If Alinma calls the certificates early, investors must reinvest at prevailing rates. But in a high-rate environment, this could mean even better returns—if they can find them.
• Strategic Use Case: For institutional investors or those with a long-term horizon, the 6.5% yield and diversification into Saudi Arabian banking (a key Gulf economy) justify the risks.

Due Diligence: Your Checklist Before Investing

1. Read the Offering Circular: Pin down the exact deferral triggers and CET1 thresholds. Assume nothing.
2. Monitor Macro Conditions: Track oil prices (Saudi Arabia’s economic lifeline), global interest rates, and geopolitical risks.
3. Assess Liquidity: Confirm secondary market depth or plan to hold to maturity.

The Bottom Line: A Gamble Worth Taking?

Alinma’s AT1 Certificates are not for the faint-hearted. The 6.5% yield is seductive, but the risks—from deferrals to liquidity—are real. However, for income seekers willing to accept asymmetric risk—i.e., the potential for outsized returns versus limited downside if Alinma’s capital stays strong—this could be a standout opportunity.

Act Now, But Act Wisely: Secure your allocation before the window closes, but only after stress-testing your appetite for structural risks. The clock is ticking—this is a play for the bold, but the rewards might just be worth the gamble.

Final Call to Action: Don’t let uncertainty hold you back. Dive into the Offering Circular, crunch the numbers, and decide: is 6.5% worth the ride? The market isn’t waiting.