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Explained: The impact of Yes Bank's AT1 bonds on debt fund investors

Investors can exit their mutual funds that had Yes Bank bonds, but they may have to do so at a loss

March 09, 2020 / 04:58 PM IST

There is bloodbath on the mutual funds street. A day after the RBI took control of Yes Bank and capped the amount that depositors can withdraw (Rs 50,000), it put out a reconstruction scheme. The proposal, which is a draft, stated that although all liabilities of Yes Bank would continue as before, the additional tier 1 (AT1) capital bonds that the bank had issued, shall be written down permanently. This announcement has caught the Rs 28 trillion Indian mutual funds (MF) industry by surprise.

Eleven fund houses hold a total of nearly Rs 3,000 crore of papers issued by Yes Bank and a majority of these are AT1 bonds issued under the Basel III guidelines, according to data from Morningstar India. Rating agency ICRA downgraded Yes Bank’s bonds to ‘D’ – the lowest credit rating that indicates a default. Thus, fund houses are mandated to completely write down the value of such instruments in their portfolio, which all fund houses holding these bonds did. This resulted in a fall of debt funds’ net asset values (NAV). For the week-ended March 6, Nippon India Strategic Debt’ fund’s NAV nose-dived 25 per cent. Nippon India Credit Risk’s value fell by nearly 12 per cent, while that of Baroda Treasury Advantage declined by nine per cent. IDBI Credit Risk Fund’s value decreased by almost 3.5 per cent. In all, 14 debt funds’ NAVs fell last week.

So, as a debt fund investor, what do you do now?

The carnage