The Bombay High Court has overturned the write-off of Rs 8,400 crore in Additional Tier-1 (AT1) bonds issued by Yes Bank Ltd, bringing relief to investors.
What exactly are AT1 bonds?
- AT-1 bonds, also known as Additional Tier-1 bonds, are unsecured, perpetual bonds issued by banks to supplement their core capital base in order to meet Basel-III standards.
- AT-1 bonds are complex hybrid instruments designed for institutions and sophisticated investors who can decipher their terms and determine whether the higher rates compensate for the higher risks.
- The face value of each bond is Rs. 10 lakh.
- Retailers obtained these bonds in two ways: through initial private placement offers of AT-1 bonds by banks seeking capital, or through secondary market purchases of already-traded AT-1 bonds based on broker recommendations.
Why are they significant?
- AT-1 bonds have several unusual features hidden in their fine print that set them apart from standard bonds.
- For starters, these bonds have no maturity date. Instead, they include call options that enable banks to redeem them after five or ten years. However, banks are not required to use this call option and may choose to pay only interest on these bonds in perpetuity.
- Two, banks that issue AT-1 bonds can skip interest payments for a specific year or even reduce the face value of the bonds without getting in trouble with their investors if their capital ratios fall below certain threshold levels. These thresholds are specified in the terms of their offer.
- Three, if the RBI believes a bank is on the verge of failure and requires assistance, it can simply instruct the bank to cancel its outstanding AT-1 bonds without consulting its investors. This is what happened to YES Bank’s AT-1 bondholders, who allegedly invested Rs 10,800 crore.