What is the News?
In March 2020, news emerged that the Reserve Bank of India’s(RBI) reconstruction plan for Yes Bank would involve the write-off of Rs 9,000 crore worth of AT-1 bonds. This decision is being contested in courts by the bondholders and mutual funds that have taken the AT-1 bonds.
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What are AT1 Bonds?
AT1 Bonds stand for additional tier-1 bonds. These are unsecured bonds that have perpetual tenure. In other words, the bonds have no maturity date.
Purpose: These bonds are typically used by banks to bolster their core or tier-1 capital. These bonds were introduced by the Basel accord after the global financial crisis.
Returns and Risk: These bonds offer higher returns to investors but compared with other debt products, these instruments carry a higher risk as well.
AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds (MFs) are among the largest investors in AT1 Bonds. These bonds have a call option, which can be used by the banks to buy these bonds back from investors.
Investors cannot return these bonds to the issuing bank and get the money. This means there is no put option available to its holders.
Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bond’s face value, provided their capital ratios fall below certain threshold levels.
If the RBI feels that a bank is on the brink of collapse and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors.
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Source: This post is based on the article ‘Did RBI Change its mind on YES Banks AT1 Bonds?’ published in Livemint on 4th Jan 2022.