All about AT1 Bonds

All about AT1 Bonds in India

First of all, let's understand what is the meaning of a bond.

A bond is referred to as a fixed-income instrument issued by companies and they have certain maturity dates. Interest is payable on a regular basis and on maturity principal amount is returned back.

AT1 Bonds Meaning:-

AT1 Bonds are unsecured bonds with no maturity date.
AT 1 bond known as Additional Tier 1 Bonds are a type of perpetual bond that banks issue to shore up their core capital base to meet the Basel-III norms.

Key Points:

1. Offer a slightly higher rate of interest or coupon compared to other bonds & very risky debt instruments.

2. AT-1 bonds are regulated by the Reserve bank of India.i.e RBI

3. Having a feature of Call Option ^

4. Investors cannot return these bonds to the issuing bank and get the money. i.e there is no put option available to its holders.

5.. Part of Tier 1 capital of banks and also called quasi-equity instruments.

6. No repayment priority if bank goes into liquidation.

^Call option means where issuer of bond reserves the right to return back the principal & stop interest payment. It is a option available to issuers (i.e banks ) to return the money.

Let's discuss Yes bank AT1 bonds issue:

When yes bank was under pressure due to management conflict of interest, huge customer default, non-reporting of correct NPA numbers, highly irregular credit management practices and others issues, RBI assumed full control of bank and brokered out a rescue plan. Under this plan, all Yes banks AT-1 bonds were written off which means the bank no longer had an obligation to pay the principal & interest payment.

Yes bank share prices fall heavily & not been recovered till date but they were not written off like AT1 bonds.

This was a major setback for AT1 Bonds market & investors.

After this incident, SEBI & Mutual fund houses took several steps to protect the interest of various stakeholders.

AT1 Bonds issuance example:-

Bank of Maharashtra raises Rs 290 crore via AT1 bonds

Bonds Details:-

Issue Size- Accepted Amt. 290 crores

Allotment Date- 24.03.2022

Coupon Rate-8.75%

Coupon Payment Date- Payable on annually basis i.e 24.03.2023 and so on till maturity.

Call option description :- Only after a minimum of five years from the Date of Allotment;

Put Option :- N/A

Nature of Instrument -Unsecured

Redemption Date - Not applicable as the Bonds are perpetual and there shall be no Redemption Date

Bank OF Maharashtra Download AT-1 Term Sheet

Author's Comment whether to invest in AT1 Bonds or not?

As you know, AT1 bonds are considered as a Debt instrument which offers slightly better interest rate but also involves huge risk.

In common parlance, people choose debt instruments as they provide safeguards from volatility, default, and provide stable returns. When an investor has the capacity to bear the risk as AT1 holders have, why not invest these funds in equity.

Equity can provide higher returns with more or less the same risk appetite. I would prefer Equity over AT1 Bonds at any time.

Disclaimer:

The purpose of this blog is to share info/opinions only not a reco to buy or sell. Do your own Due diligence before taking any decision.

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All about AT1 Bonds