What are AT1 bonds?

AT1 bonds, also known as Additional Tier 1 bonds, are a type of debt instrument issued by banks to raise capital. These bonds are considered to be riskier than traditional bonds because they are perpetual, which means they have no maturity date, and they may be converted to equity at the discretion of the issuing bank.

AT1 bonds are part of the regulatory capital of banks and are designed to absorb losses in case of a bank’s financial distress. They are considered to be a form of hybrid capital because they have characteristics of both debt and equity. They pay a fixed coupon rate, similar to traditional bonds, but if the issuing bank’s capital falls below a certain level, the bank may choose to defer coupon payments or convert the bonds into shares.

AT1 bonds are usually only available to institutional investors and are not widely traded on secondary markets. They are typically issued by large global banks and are subject to regulatory requirements and restrictions, such as minimum coupon rates and limitations on the amount of AT1 capital a bank can issue.

India’s Yes Bank and the AT1 bonds story.

Yes Bank, a private sector bank in India, issued AT1 bonds in the past to raise capital. In 2019, the bank faced financial difficulties due to non-performing assets, and the Reserve Bank of India (RBI) took control of the bank and imposed restrictions on its operations.

As part of the RBI’s restructuring plan, Yes Bank’s AT1 bondholders suffered losses as the bank wrote down the value of these bonds to zero.

This move was controversial as it affected individual investors who had invested in these bonds, many of whom were not aware of the risks associated with these securities. The incident raised concerns about the lack of awareness among retail investors about the risks of investing in complex financial instruments like AT1 bonds.

Since then, the RBI has tightened regulations around the issuance of AT1 bonds to ensure that investors are aware of the risks involved, and has also introduced measures to protect retail investors in case of bank failures.