1. In the back drop of @YESBANK Bank fiasco and total write off of AT1 Bonds issued by them, it is necessary to understand what is AT1 (aka Perpetual Bonds) and what should the Investors expect. This crisis will have far reaching implications for all future AT1 issuances as well
2. What is AT1 Bonds? An AT1 bond constitutes direct, unsecured and subordinated debt in the issuing bank, ranking junior to the claims of all creditors (including all subordinated creditors) and only senior to common equity. Please remember this
3. Total outstanding of all AT1 issuances by all Banks is close to 91,000 crores (including Rs.38,000 crores by Private Sector Banks like ICICI Bank, HDFC Bank, Axis Bank, Yes Bank, etc.). These figures are as of 23-02-2020
4. Both Private and PSU Banks regularly issue AT1 Bonds to shore up their Tier 1 Capital. In a short span of time it has become a very important source of Capital. These instruments have strengthened the Banking Sector
5. There is huge participation by Retail investors directly or indirectly in these Bonds either through the Mutual Fund or the Insurance Company route. There are no precedents to such a drastic move by @RBI in writing off the entire value of these Bonds in the past
6. Just for this reason of protecting the interests of Retail participants, RBI has in the past relaxed AT1 guidelines to ensure timely servicing of coupons and even early buy-backs of AT1 Bonds
7. In 2016 and 2017, RBI changed guidelines to allow to pay coupons from reserves. Many Small Banks have reported losses and NPAs since 2016-17. Without these changes, IOB would have defaulted in 2017. Govt also injected funds in IDBI Bank for similar purpose
8. As can be seen from these past events & Guideline changes,there was no precedent on the likes of AT1 Bonds of #YESBANK and its total write off as mandated by RBI. @SEBI_India SEBI & Govt of India are committed to Investor Protection. This move of #RBI will do just the opposite
9. RBI thinks that these AT1 Bonds are bought by Institutional Investors and will have no negative implications in the Capital Markets. Investors who have bought thru the Mutual Fund route are all Retail Investors & MFs are just pass thru Vehicles
10. Also, going forward, no Banks will be able to access this route for raising capital and no #MutualFunds will lend to these Banks either; thereby drying up this source at the same time losing out on Retail participation through MF route
11. Information Memorandum of one AT1 instrument stated: “the claims of Bond Holders in the Bonds shall be superior to the claims of Investors in Equity shares”. This clearly implies that unless Equity is Zero, Bond Holders can’t be Zero
12. Many fund houses who have invested in these AT1 Bonds will be approaching the courts for redressal against this @RBI Order. Some of the Fund Houses who have invested in Yes Bank AT1 Bonds include: @utimutualfund @FTIIndia, @NipponIndiaMF
13. Most Mutual Fund houses have questioned this step of RBI and called it retrograde. This is the first time AT1 Bonds are written off ahead of Equity. Equity shareholders will continue to own 51% but AT1 Bond holders will suffer full loss. Unheard of
14. Only one situation can be right: SBI believes Yes Bank has enough value to command a premium. On the other hand, RBI believes that Yes Bank has no realisable value and hence AT1 Bonds need to be written off. Both can’t be right
15. All #Investors affected need to have patience as this is not the last word on this Topic. Many representations will be made by #MutualFund, #Insurance Industry to come out of this. Look up this space for more updates
