Thread by @ICICI_Direct

Yes Bank fell by over 12% last week on #BombayHC ruling🔻

It ruled the bank to pay back its AT1 Bonds investors

- What are AT1 Bonds?
- Are AT1 Bonds safe investments?
- What is the Bombay HC judgement?

A thread🧵👇 (1/12)

1/ What are AT1 Bonds?

Banks issue AT1 Bonds which have the following features:

- Unsecured

- Perpetual in maturity [Banks may decide to pay interest forever]

- Call option [Banks have the right to redeem the bonds]

(2/12)

2/ Why do people subscribe?

Banks offer higher interest rate on AT1 Bonds than other fixed income instruments, e.g., Fixed Deposit etc.

(3/12)

3/ Why do Banks issue it?

As per RBI, Tier I capital consists mainly of:

- Share capital and
- Disclosed reserves

It shows bank's highest quality capital as it is fully available to cover losses without touching deposits

Contd..👇 (4/12)

As per Basel III norms, banks are required to maintain at least 7% of Risk weighted Assets as Tier1 capital

Tier 1 includes AT1 Bonds

So, without diluting equity, Banks can raise AT1 bonds to comply with norms

But what's the problem? Read on👇

(5/12)

4/ Problems with AT1 Bonds

[A] AT1 Bond holders face the heat first

For example, in case of Yes Bank, shareholders' still have their shares but the restructuring plan proposed for write-off of bonds

Thus, riskier than equity without any upside potential

(6/12)

[B] Banks may call these bonds

In the good times, bank may decide to call back (known as "Call Option") and redeem the bonds at par value

E.g., when interest rates are 5% but AT1 Bonds' interest rate is 8%

Bank may pay you back the money, raise at 5% and save 3% [8-5%] (7/12)

AT1 Bonds can be called as instruments with:

- Upside of nothing (unlike equity) and

- Downside side of bonds

(8/12)

5/ Bombay HC judgement makes AT1 Bonds safe?

Short answer: No!

How come?🤔👇

The administrator wrote off the AT1 Bonds worth ~₹8,500 Cr. on 14 Mar, 2020

However, the reconstitution plan was submitted on 13 Mar, 2020 which didn't contain the writing off part

(9/12)

The reconstitution provisions providing for writing off the AT1 Bonds were there in the draft schemes but not in the final one

And thus, the Bombay HC ruled that writing off such bonds is not tenable under law

(10/12)

At the request of bank, the Bombay HC has stayed the order for 6 weeks

Yes Bank is in the process of preferring an appeal before the Supreme Court

Hence, impact of this, if any, shall be considered once the final outcome of the litigation is known

(11/12)

6/ ICICI Securities' Target

We maintain a HOLD rating on the scrip

CMP (24th Jan'23): ₹18.2 per share
Target: ₹19.2 per share

(12/12)

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