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Yes Bank’s AT1 bondholders will get zilch after the hurried bailout

Total write down of Yes Bank's additional tier-1 bonds will impact not only institutional investors, but also retail investors

March 15, 2020 / 12:57 PM IST
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With Yes Bank’s Rs 8,415 crore worth Additional Tier-1 (AT1) bond portfolio set to be written down fully, there could be rush to sell off such bonds in the market resulting in yields to spike.

AT1 securities are a type of contingent convertible bonds designed after the financial crisis to try to ensure that investors would be on the hook if a bank runs into financial stress.

“There is a possibility of this impacting the capital raising plans of other banks. Also, those holding these bonds could go for a risk reassessment leading to a rush to sell off these bonds resulting in a price fall,” said SV Sastry, MD and CEO, SBI DFHI.

After the Yes Bank reconstruction scheme was notified by the government, there was a confusion in the market on March 14 on whether these bonds will be honoured or extinguished as said in the draft reconstruction scheme made public by the Reserve Bank of India (RBI). But, Yes Bank’s RBI-appointed administrator, Prashant Kumar clarified that these bonds will be written down fully, as per the agreed reconstruction scheme.

This is because the reconstruction scheme was formed after the RBI invoked Section 45 of the Banking Regulation Act, 1949, which arises when the bank is deemed to be non-viable or approaching non-viability, enabling the write-down of certain Basel III AT1 Bonds.


“In light of the above provisions of the Basel III Circular, the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the Bank for an amount of Rs 3,000 crores on December 23, 2016 and the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the Bank for an amount of Rs. 5,415 crores on October 18, 2017 have been fully written down and stand extinguished with immediate effect,” Kumar informed exchanges.

The total write down of AT1 bond portfolio will make capital raising tougher for the industry. After the Yes Bank write down of AT1 bonds, private sector lender, IndusInd Bank had deferred a board meeting which was scheduled to discuss raising capital through these bonds, blaming the “current market conditions” for the deferral and said it was sufficiently capitalised.

Also read: The good, bad and the ugly of Yes Bank’s Q3 numbers, rescue fine print

Legal battle

But the dust is unlikely to settle quickly. According to media reports, investors in these bonds have already started approaching courts for resolution.

Last week, Axis Trustee representing, bondholders of Yes Bank’s AT1 bonds filed a writ petition in the Bombay High Court seeking remedy against the Reserve Bank’s decision to extinguish these bonds.

The petitioners have argued that the total write down of AT1 bonds, treating these instruments below equity is not fair. Besides Axis Trustee, Larsen & Toubro has also moved the Bombay High Court separately against the AT1 bond write down decision.

Bondholders have invested a total of nearly Rs 94,000 crore in AT1 bonds issued by Indian banks, according to rating agency ICRA. AT1 bonds, also called perpetual bonds, are considered quasi-equity instruments and are riskier than Tier 1 bonds.

Misselling to retail investors?

Not only institutions, but also retail investors who will suffer on account of the AT1 bond write down.

Retail investors, though form only a minority among the institutional investors, too have reportedly approached the RBI seeking at least their principal amount back.

According to a report in the Financial Express, at least 70 bond holders have so far written to the RBI.

They have alleged that these bonds were sold to them without making them aware of the actual risk involved in these investments, hence being tantamount to misselling.  Moneycontrol could not independently verify the report.
Dinesh Unnikrishnan
first published: Mar 15, 2020 11:20 am

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