AT1 Bond
A perpetual, bank-issued bond that can be written down or converted to equity if the bank's capital falls below a regulatory threshold. It pays a higher yield for a higher, less typical kind of risk.
The loss-absorption feature
AT1 bonds are designed by regulation to absorb a bank's losses before depositors do. If the bank's capital ratio breaches a preset trigger, or the regulator deems the bank non-viable, the bonds can be written down to zero or converted to equity, even while the bank continues operating and other creditors are paid in full.
Why the yield looks attractive
Because AT1 bonds sit below almost every other creditor in the repayment order and carry this loss-absorption risk, they pay a meaningfully higher coupon than a bank's regular senior bonds. That extra yield is compensation for a risk that is structurally different from an ordinary issuer default, and can be larger.