AT1 BONDS

AT1 BONDS

Subject : Economics

Context : The decision of the Securities and Exchange Board of India (Sebi) to slap restrictions on mutual fund (MF) investments in additional tier-1 (AT1) bonds has raised a storm in the MF and banking sectors.

Concept :

• AT-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.
• There are two routes through which these bonds can be acquired:

Initial private placement offers of AT-1 bonds by banks seeking to raise money.

Secondary market buys of already-traded AT-1 bonds.

• AT-1 bonds are like any other bonds issued by banks and companies, but pay a slightly higher rate of interest compared to other bonds.
• These bonds are also listed and traded on the exchanges. So, if an AT-1 bondholder needs money, he can sell it in the secondary market.
• Investors cannot return these bonds to the issuing bank and get the money. i.e there is no put option available to its holders.
• However, the issuing banks have the option to recall AT-1 bonds issued by them (termed call options that allow banks to redeem them after 5 or 10 years).
• Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value.
• AT-1 bonds are regulated by RBI. If the RBI feels that a bank needs a rescue, it can simply ask the bank to write off its outstanding AT-1 bonds without consulting its investors.