YES Bank crisis: All you need to know about AT-1 bonds

The YES Bank crisis has led to huge risk for a new class of investors, apart from retail investors and mutual funds. Additional tier -1 (AT-1 ) bonds also called perpetual bonds issued by YES Bank will cause a loss of around Rs 10,800 crore to their holders since Reserve Bank of India has proposed writing-down the AT-1 bonds as part restructuring process of the private lender.

YES Bank issued these bonds to mutual funds (MFs), banks' treasuries and retail investors.

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A substantial portion of these bonds are held by MFs and banks, according to Acuite Ratings. Acuite Ratings sees a loss of Rs 10,800 crore when bondholders will be forced to take a 100 per cent haircut on the bank's AT-1 bonds. The brokerage said the move could drive away investors from such bond issues in the future.

AT-1 bonds are annual coupon bearing bonds which have no fixed maturity date. The interest rate on these bonds is higher than fixed deposit rates which make them attractive investment option. These bonds do not have any maturity date. The holders of these bonds can get their investments back by selling them in the secondary debt market unless the issuer redeems them.

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The issuer of these bonds does not have legal obligations to redeem them.  Interest on these bonds can be paid only at the discretion of the issuing body  and that too out of annual profit.

As per ICRA's estimates, a total of Rs 93,669 crore of AT-I bonds will be outstanding as on date (Rs 84,574 crore excluding YES Bank), of which Rs 39,315 crore will be of private banks (Rs 30,620 crore excluding Yes Bank).  

Most of these bonds were issued during FY2017 and FY2018 with first call option after 5th year from issuance and hence large bonds are due for call in FY2022 and FY2023.

After the 2008 financial crisis, new instruments called the Additional Tier-1 (AT1) bonds were introduced to protect depositors of a bank on a "going concern" basis under the The Basel-III accord. The instrument involves the imposition of losses on its holders without the bank being liquidated, if the common equity tier-1 (CET 1) ratio of the lender falls below a threshold level.

By Aseem Thapliyal