AT1 Bonds

AT1 Bonds

Part of: GS Prelims and GS-III- Economy

In News:

• YES Bank’s AT-1 bond-holders are said to have invested ₹10,800 crore and RBI’s restructuring plan proposes to completely write off the dues on these bonds
• AT-1, short for Additional Tier-1 bonds, are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms
• AT-1 bonds have several unusual features like
  • One, these bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. 
  • But banks are not obliged to use this call option and can opt to pay only interest on these bonds for eternity
  •  Two, banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value provided their capital ratios fall below certain threshold levels specified in the offer terms
  • Three, if the RBI feels that a bank is tottering on the brink and needs a rescue, RBI can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors. 
• The Association of Mutual Funds in India (AMFI) has requested RBI and SEBI for a temporary write down of AT1 Bonds of Yes Bank instead of completely writing it off

• Why temporary write down?

• • These bonds typically have a call option after five years and hence if the central bank allows a temporary write down, the fund houses may still be able to stem the potential losses if the valuation of the bank improves after restructuring.