AT1-Bonds
Wide risk-reward spectrum.
YES Bank will go in the history of bond markets in India as the first bank whose additional tier bonds, referred to as AT1 bonds, were written off in line with the provisions mentioned when these bonds were issued.
The Bombay High Court recently quashed the decision to write off the bond. The last word on the matter has yet to be out, though YES Bank said it will appeal in the Supreme Court.
What are AT-1 bonds?
AT1 bonds have a perpetual tenor and are unsecured. In other words, there is no maturity date for these bank-issued bonds. These bonds are also called perpetual bonds. Banks often raise funds through these bonds to increase their tier-1 or core capital. The banks may use their call option to repurchase these bonds from investors.
One of the most prominent investors in perpetual debt securities is mutual funds. Only common equity, or equity share, is senior to AT1 bonds. These bonds are subordinate to all other debts.
AT1 bonds typically have a face value of ₹Rs 10 lakhs per bond and offer higher interest rates.
The AT1 bonds have features of both debt and capital.
The AT-1 bond of a bank with a strong balance sheet and one that is well capitalized is sought after and functions like a regular debt instrument. There is regular coupon payment on such AT-1 bonds, and most likely, the call option is exercised.
For a bank that's on the verge of collapse, the regulator may allow a delay in coupon payment, scrap the coupon payment, or write off the bonds altogether.
The RBI had asked YES Bank to write off its AT-1 bonds.
Usually, banks get infused with fresh capital after AT-1 bonds are written off.
Why AT-1 bonds are issued?
After the Global Financial Crisis of 2008, precipitated by the Lehman Crisis of 2008, it was felt there was a need to allow banks to have more instruments to raise capital.
AT-1 bonds emerged as non-equity capital instruments, with built-in features that help a bank treat these bonds as equity in case the bank's outlook is bleak.
According to the BASEL-III framework, AT-1 debt instruments can have discretion on coupon payments, a higher threshold for coupon payments compared with regular bonds and the principal amount can be used to absorb losses.
The Basel III norms, framed by the Basel Committee on Banking Supervision, have classified a bank's capital into Tier 1 and Tier 2.
Tier-1 is subdivided into Common Equity Tier-1 and Additional Tier-1, or AT-1, the capital.
Tier 1 capital is the main funding source for banks. Tier 1 capital comprises of equity and reserves.
Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt and general loan-loss reserves.
Banks are frequent issuers of AT-1 perpetual bonds to shore up their core capital and meet their capital adequacy requirements in India.
Data from the National Stock Exchange show that Indian banks raised over Rs 20,000 crores via AT-1 bonds in 2022.
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