Bank of Montreal's AT1 Capital Raise: Strategic Resilience in a Post-Crisis Era

In the aftermath of the 2023 global banking crisis, the role of Additional Tier 1 (AT1) instruments in bank capital structures has become a focal point for investors, regulators, and financial institutions alike. The collapse of Credit Suisse and the sudden write-off of its AT1 bonds by Swiss regulators exposed critical vulnerabilities in the design of these instruments. However, Bank of Montreal (BMO) has emerged as a case study in how a well-structured AT1 issuance can align with both regulatory demands and investor expectations. BMO's recent $1.0 billion NVCC AT1 raise, announced in July 2025, offers a compelling lens through which to assess the strategic value and risk-adjusted returns of AT1 instruments in today's banking landscape.

The Anatomy of BMO's AT1 Issuance

BMO's Limited Recourse Capital Notes (LRCNs), Series 6, are structured as non-viability contingent capital (NVCC) instruments, meaning they can be written down or converted if the bank is deemed non-viable under regulatory criteria. The LRCNs carry an initial interest rate of 6.875% annually, with quarterly payments until 2030, followed by five-year resets tied to the U.S. Treasury rate plus a fixed margin of 2.976%. Maturity is set for 2085, a 60-year horizon that underscores the long-term capital planning at play.

A key innovation in BMO's structure is the limited recourse trust. Holders of the LRCNs have recourse only to the assets of a trust holding BMO's NVCC Non-Cumulative Preferred Shares, Series 55. This design limits the Bank's exposure in the event of non-payment, shielding its broader balance sheet from direct claims. The trust acts as a buffer, aligning with post-2023 regulatory scrutiny of AT1's loss-absorbing capacity.

Strategic Value: Strengthening Capital Resilience

BMO's AT1 issuance is not just a capital-raising exercise—it is a strategic move to bolster its regulatory capital ratios and support its growth ambitions. With total assets of $1.4 trillion as of April 2025, BMO ranks among North America's largest banks. Its Common Equity Tier 1 (CET1) ratio of 12.5% (as of October 2023) already reflects a robust capital position, but the addition of AT1 capital via the LRCNs will further fortify its buffer. This is particularly critical in a post-crisis environment where regulators demand banks maintain higher liquidity and loss-absorbing capacity.

The issuance also aligns with BMO's broader capital management strategy. Proceeds will be used for general banking purposes, including the redemption of older capital securities and repayment of liabilities. This flexibility allows BMO to optimize its capital structure without over-leveraging its equity base. For investors, the AT1's 6.875% initial yield is attractive in a rising-rate environment, especially given BMO's investment-grade credit profile (A+ by S&P, AA- by Fitch).

Risk-Adjusted Returns: Balancing Yield and Contingent Risks

While the LRCNs offer a compelling yield, investors must weigh the inherent risks of AT1 instruments. The NVCC clause, which allows regulators to write down or convert the bonds in a non-viability event, remains a wildcard. However, BMO's limited recourse structure mitigates some of this risk by insulating investors from full claims on the Bank's broader assets. This design reduces the likelihood of a “zero recovery” scenario like the one seen in Credit Suisse's collapse.

The five-year reset mechanism tied to U.S. Treasury rates introduces another layer of complexity. While it protects investors from long-term rate compression, it also exposes them to future volatility. For instance, if Treasury rates decline post-2030, the spread of 2.976% could result in lower yields than the initial 6.875%. Conversely, rising rates could enhance returns, making the LRCNs a dynamic instrument for long-term investors.

Regulatory Evolution and Investor Sentiment

The 2023 crisis forced regulators to rethink AT1 frameworks. In Europe, the European Banking Authority (EBA) now emphasizes transparency in AT1 valuations, while Australia's APRA is reviewing trigger levels for bail-ins. BMO's limited recourse structure preemptively addresses some of these concerns by ensuring its AT1 instruments are both resilient and aligned with evolving regulatory expectations.

Investor sentiment, however, remains cautious. The Credit Suisse incident has made retail and institutional investors wary of AT1's contingent risks. BMO's issuance, supported by a consortium of top-tier underwriters (including Goldman Sachs and J.P. Morgan), signals strong institutional confidence. Yet, the Bank's reliance on NVCC clauses and the long-term nature of the LRCNs (60-year maturity) require investors to conduct thorough due diligence.

Investment Implications and Recommendations

For sophisticated investors, BMO's AT1 issuance presents a high-yield opportunity with a nuanced risk profile. The 6.875% initial coupon is competitive, particularly for those seeking income in a low-growth environment. However, the following factors warrant careful consideration:
1. Regulatory Contingencies: Monitor BMO's viability status and potential changes to NVCC rules in Canada.
2. Interest Rate Sensitivity: The five-year reset mechanism ties returns to macroeconomic trends, requiring a long-term outlook.
3. Creditworthiness: BMO's stable credit ratings (A+ by S&P, AA- by Fitch) provide a safety net, but the limited recourse structure means investors must rely on the trust's assets, not the Bank's balance sheet.

Conclusion: A Model for Post-Crisis Capital Planning

Bank of Montreal's AT1 issuance exemplifies how large banks can adapt to a post-crisis world by blending innovation with regulatory compliance. The LRCNs' limited recourse structure and dynamic yield mechanism address many of the shortcomings exposed in 2023, offering a balanced approach to capital resilience. For investors, this issuance underscores the importance of understanding the terms and conditions of AT1 instruments, particularly in an era where regulatory interventions can reshape risk-return profiles overnight.

In a landscape where capital resilience is paramount, BMO's move is a testament to the evolving role of AT1 instruments—not just as regulatory tools, but as strategic assets for long-term financial stability.