Perpetuals: Still Worth the Risk in GCC Portfolios?

GCC markets have experienced a surge in perpetual Tier 1 issuances as issuers move swiftly to strengthen their capital adequacy. This wave of supply has attracted strong demand from high-yield investors, particularly for Sharia-compliant instruments. In an environment shaped by lower interest rates, call behavior, and evolving regulatory frameworks, a more nuanced risk analysis is essential to identify value in a market flooded with new issuances. We aim to explore current trends, issuer dynamics, and assess whether perpetuals still deserve a place in regional investment portfolios.

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KSA’s Surge in Tier 1 Issuance

Saudi Arabia has emerged as a leader in 2025, with a notable increase in Tier 1 perpetual issuances from banks such as Al Rajhi, Banque Saudi Fransi, and Saudi Awwal Bank, among others.

This momentum is driven by the need to bolster regulatory capital ratios in line with Basel III requirements and to prepare for the implementation of Basel IV standards. Issuing Tier 1 capital instruments enables banks to support future lending activities without diluting shareholder equity, making these instruments an effective tool for balance sheet management. Additionally, this trend underscores Saudi Arabia’s broader efforts to deepen its domestic capital markets.

Tier 1 Perpetuals vs. Senior Unsecured Debt

Tier1 perpetuals are structured to absorb losses and support regulatory capital.While they typically offer higher yields, they also carry additional risks, including extension risk, subordination risk, and the possibility of coupon deferral. In contrast, senior unsecured bonds offer a more predictable risk-return profile, featuring fixed maturities, higher repayment priority, and enforceable coupon obligations.

When comparing instruments from the same issuer, perpetuals generally trade at wider spreads, offering a yield pickup over their senior unsecured counterparts.

The comparison below illustrates this dynamic using Al Rajhi Bank’s instruments: a perpetual AT1 bond callable in 2030 and a senior unsecured bond maturing in2030.

As shown, the AT1 perpetual currently yields 5.79%, compared to the senior unsecured bond, which trades at a tighter yield of 4.93%. The median spread between the two stands at approximately 90 basis points.

Another comparison between a perpetual AT1 Sukuk callable in 2030 and a senior unsecured Sukuk maturing in 2030 from Banque Saudi Fransi reveals an even wider spread between the two instruments.

As illustrated below, the AT1 perpetual Sukuk currently yields 6.55%, compared to the senior unsecured Sukuk, which trades at a yield of 4.88%. The median spread between the two stands at 168 basis points, offering investors a notable yield pickup in exchange for the additional risk associated with perpetual instruments.

High Yields, Worth the Risk?

GCC perpetuals, particularly those issued by well-established, reputable financial institutions, have gained popularity among investors seeking higher yields. These instruments often offer coupons exceeding 6%, significantly outperforming traditional senior debt issued by the same entities. However, the absence of a fixed maturity date introduces extension risk: investors may not be repaid on the first call date, or even shortly thereafter. This dynamic creates a trade-off between locking in attractive yields and accepting uncertainty around exit timing and price stability.

Tier 1 (AT1) debt allows issuers to meet Basel III Tier 1 capital requirements without diluting shareholder equity, while also offering flexibility through discretionary, non-cumulative coupon payments. These instruments include a non-viability mechanism, such as a write-down or equity conversion, that is triggered if capital ratios fall below a specified threshold, helping absorb losses and support bank solvency. Their perpetual structure, combined with call options, provides refinancing flexibility. Meanwhile, the high yields they offer enhance funding efficiency and improve market access for issuers.

Credit Strength as a Buffer

One of the primary reasons investors are willing to accept the risks associated with GCC perpetuals is the strong fundamental profile of the issuers. Banks in the UAE and Saudi Arabia are generally well-capitalized, consistently profitable, and often benefit from implicit or explicit government support. This financial strength and sovereign backing provide investors with greater confidence in the issuers’ ability to meet their obligations, even under stress scenarios.

Spreads, Reset Mechanics, and CallBehavior in GCC Perpetuals

Spreads and reset mechanics are fundamental to pricing perpetual bonds and shaping investor return expectations. In the GCC, Tier 1 instruments typically reset every five years, using a benchmark such as the 5-year U.S. Treasury yield plus a fixed spread.

Reset spreads generally range between 180 and 250 basis points and serve as a key indicator of both extension risk and reinvestment appeal. Analyzing Z-spreads (zero-volatility spreads) and reset margins provides investors with valuable insight into regional credit risk, sovereign support, and the likelihood of an issuer exercising its call option. In a declining global interest rate environment, the convexity and positive reset optionality embedded in these structures become increasingly relevant, especially when issuers have demonstrated disciplined call behavior.

DPWDU 6 PERP, a perpetual bond with an upcoming call date on October 10, 2025, has a fixed reset spread of +575 basis points. Based on the current 5-year U.S. Treasury yield of 3.96%, the assumed reset coupon would be approximately 9.71%. This represents a significantly higher financing cost for the issuer compared to current market rates, making it highly likely that the issuer will exercise the call option.

Another example is the DIBUH 4⅝ PERP, a Tier 1 perpetual issued by Dubai Islamic Bank, callable on May 19, 2026. With a reset spread of +407.70 basis points, the projected coupon post-reset would be around 8.12%. Similar to DPWDU 6 PERP, this elevated cost relative to new issuance levels suggests a strong likelihood of the bond being called.

Balancing Complexity and Opportunityin GCC Perpetuals

Despite their structural complexities, GCC perpetuals continue to present compelling opportunities for yield-seeking investors. In a relatively stable credit environment, value can still be found, particularly among state-linked or well-established issuers. However, it is essential for investors to look beyond headline coupon rates.

Key considerations include historical call behavior, the transparency and consistency of issuer communication, and the presence of investor-friendly features such as attractive reset spreads. While perpetuals are inherently more complex and carry higher structural risk—especially for the average retail investor—the GCC market offers a favorable risk-reward profile when compared to global peers.

For investors with a higher tolerance for duration and credit risk, these instruments remain a viable option for portfolio diversification and yield enhancement.