AT1bonds

AT1bonds

Subject: Economy

Section:  capital Market

Context: The Bombay High Court Friday quashed the write-off of additional Tier-1 (AT1) bonds worth Rs 8,400 crore issued by Yes Bank Ltd, giving a big relief to investors who invested in these bonds

What are AT1bonds?

AT1 Bonds are unsecured bonds that have perpetual tenor. In other words, these bonds, issued by banks, have no maturity date. They have a call option, which can be used by the banks to buy these bonds back from investors. These bonds are typically used by banks to bolster their core or tier-1 capital.

AT1bonds are subordinate to all other debt and only senior to common equity.

Mutual funds(MFs)were among the largest investors in perpetual debt instruments.

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:

1. Initial private placement offers of AT-1 bonds by banks seeking to raise money.
2. 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.