Additional Tier-1 (AT1) bonds
Economic Development > Indian Economy and Issues > Financial market
Why in news?
- 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, bringing relief to investors.
What are AT1 bonds?
- Introduced under the 2010 Basel III norms, AT1 bonds qualify as regulatory capital and were rolled out to better protect depositors following the global financial crisis of 2008-09.
- They are like any other bonds issued by banks and companies, but pay a slightly higher rate of interest compared to other bonds.
- AT1 bonds are unsecured bonds that have perpetual tenor. In other words, these bonds 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 to shore up their core capital base to meet the Basel-III norms.
- They are also listed and traded on stock exchanges. This means that the person holding the bond can sell it in the secondary marketing in case funds are required.
- AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds (MFs) were among the largest investors in perpetual debt instruments.
- Banks issuing AT-11 bonds can even reduce the bonds’ face value.
- AT-1 bonds are regulated by the Reserve Bank of India (RBI). If there is a need for RBI to bail out a bank it can tell the bank to write-off its outstanding AT-1 bonds without necessarily consulting its investors.
Consider the following statements:
1. They are secured bonds with one year maturity
2. They are regulated by the Reserve Bank of India (RBI)
3. They pay a slightly higher rate of interest compared to other bonds
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 2 only
(d) 1,2 and 3