Additional Tier-1 (AT1) bonds

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.

Features:

• 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.

Regulated by:

• 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.

PRACTICE QUESTION:

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

Answer