Alinma Bank's AT1 Certificates: A High-Yield Gamble or Strategic Opportunity?

Alinma Bank, Saudi Arabia’s leading Islamic banking institution, has entered the global capital markets with its $1 billion USD-denominated Additional Tier 1 (AT1) capital certificates issuance—a move that has drawn attention from income-seeking investors. With a 6.5% annual coupon and perpetual maturity, the certificates offer an attractive yield in a rising rate environment. But beneath the surface, questions linger about the alignment of their terms with investor priorities and the risks embedded in their structure. Here’s why the decision to invest hinges on parsing the fine print and macroeconomic context.

The Structure: Yield Meets Uncertainty

The AT1 certificates, issued in February 2024, are structured as perpetual instruments with a call option after five years. This means Alinma can redeem the debt as early as 2029, potentially forcing investors to reinvest at lower rates. The 6.5% coupon is fixed, offering a steady income stream, but there’s a critical caveat: the coupon deferral triggers—the conditions under which Alinma could suspend payments—are not explicitly detailed in the public documents. The Offering Circular, referenced but not disclosed, likely ties deferrals to regulatory capital thresholds or dividend restrictions. In Basel III-compliant structures, such triggers typically include scenarios where the bank’s Common Equity Tier 1 (CET1) ratio falls below a critical level (e.g., 7%).

Investors must weigh this opacity against Alinma’s strong capital position. As of 2024, the bank reported a 172.26% coverage ratio for non-performing loans and an 18.80% return on equity, signaling robust financial health. This suggests the issuance may be a strategic move to bolster capital buffers rather than a sign of distress. Yet, the lack of transparency on deferral mechanics introduces asymmetry: investors bear the risk of sudden coupon suspensions, while Alinma retains flexibility.

Alinma’s stock performance offers a proxy for its financial stability. A resilient stock price amid regional economic headwinds supports its creditworthiness.

Risk-Return Dynamics in a Rising Rate World

The current macroeconomic environment amplifies the appeal of AT1s. Central banks globally are hiking rates to combat inflation, pushing yields higher. The 6.5% coupon on Alinma’s certificates outperforms 10-year Treasury yields (around 4.5% as of May 2025), making them a compelling income alternative. However, two risks loom:

1. Coupon Deferral Triggers: The absence of explicit thresholds in public disclosures means investors must rely on trust in Alinma’s capital management. If the bank’s CET1 ratio weakens—due to loan losses or regulatory changes—coupon deferrals could occur, leaving investors with no income.
2. Currency and Liquidity Risks: The certificates are USD-denominated, aligning with Alinma’s need to diversify its funding into a stable currency. Yet, this exposes non-USD investors to exchange rate fluctuations. Additionally, the perpetual structure may limit secondary market liquidity, complicating exit strategies.

Why This Could Be a Tactical Win

For income-focused investors with a high-risk tolerance, the AT1 certificates present a tactical opportunity:
- Yield Advantage: The 6.5% coupon provides a meaningful spread over sovereign debt in a low-growth world.
- Bank Strength: Alinma’s capital ratios and growth metrics (17% total asset growth in 2024) suggest it’s a reliable issuer.
- Regulatory Alignment: As an AT1 instrument, the certificates meet Basel III requirements, making them a cornerstone of Alinma’s capital structure. Their inclusion in the bank’s strategy signals confidence in its financial trajectory.

Alinma’s 6.5% coupon sits at the higher end of the AT1 yield curve, reflecting its regional risk premium.

The Cautionary Case

Critics argue that the opacity around deferral triggers and the call feature’s reinvestment risk make this a gamble. If Alinma redeems the certificates early, investors may face capital redeployment at lower yields. Worse, if economic downturns strain its capital ratios, coupon deferrals could materialize, eroding income. The lack of explicit terms leaves investors vulnerable to adverse surprises.

Conclusion: Proceed with Due Diligence

Alinma’s AT1 certificates are a high-risk, high-reward proposition. The 6.5% yield is enticing, but investors must scrutinize the Offering Circular for deferral triggers and assess their tolerance for coupon suspensions and reinvestment risk. For those comfortable with these risks—particularly long-term income investors—this could be a tactical addition to a diversified portfolio. For others, the uncertainties may justify a pass.

In the end, Alinma’s issuance reflects a broader theme: banks are capitalizing on strong fundamentals to issue AT1s at favorable terms. Investors who do their homework—and accept the asymmetry—might find this a rewarding play in a yield-starved world.