AT-1 Perpetual Bonds – Should investors avoid such investment options post Yes Bank Crisis?
These days we are hearing about the RBI decision about AT1 bonds that are issued by Yes Bank. AT1 Bonds are perpetual bonds. Several Mutual fund schemes invested in these AT1 Bonds. Even several retail investors invested in these bonds. Today, these are collapsed with RBI decision. The value of such bonds is indicated as zero now. What are AT1 bonds all about? How investors lost money through this AT1 bond? Should investors avoid such AT1 bonds or perpetual bonds in the future?
Also Read: Which are the list of mutual fund schemes impacted with Yes Bank Crisis?
The RBI decision on AT1 Bonds issued by Yes Bank
RBI has passed a moratorium on Yes bank imposing several restrictions on it. One cannot withdraw more than Rs 50,000 from Yes bank account and one cannot pay their credit card bill or loan amount. On 10th March, it lifted certain restrictions where one can pay credit card bills and loan EMIs in Yes bank accounts. Yes Bank has issued AT1 Perpetual bonds where RBI said these are extinguished i.e. the value of such bonds are zero. Questions are being now raised about AT1 bonds.
What are AT1 Bonds?
AT1 Bonds are perpetual bonds which are issued by corporates and banks. Here are the features of the AT1 Perpetual Bonds.
1) These are referred as Additional Tier-1 Bonds and popularly known as AT1in bonds.
2) These are issued by banks for long term capital requirements.
3) These do not have an expiry date. Means there is no maturity date for such AT1 bonds. Hence, these are treated like quasi-equity instruments by banks.
4) RBI is the regular of these AT1 perpetual Bonds.
5) AT1 bonds pay interest like any other bonds like NCDs or tax free bonds that are issued by corporates or banks. Such interest is paid on the regular basis.
6) Since there is no maturity date for these bonds, these are issued at higher interest rates.
7) There is no obligation to the banks to repay the principal amount on such AT1 bonds.
8) These perpetual bonds are listed on stock exchanges and traded like other listed bonds.
9) The only way AT1 bond holder can get back their principal would be selling this on stock exchanges. However, it is at the price quoted on the stock exchange.
10) Issuing banks can call back such AT1 bonds if they want to repay the money to investors.
11) As of the end of last month, there is total of Rs 94,000 Crores AT1 bonds are issued in India. Out of this Rs 55,000 crores issued by public sector banks and Rs 39,000 crores issued by private sector banks.
Some of the mutual funds have invested in such perpetual bonds. Now even retail investors invested in the Bonds issued by Yes Bank. There is total of Rs 8,700 crores invested by mutual funds, pension funds and retail investors in AT1 bonds of Yes Bank. If RBI plan is executed, all such investors would loose their money.
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Should investors avoid such AT1 bonds or perpetual bonds in the future?
It is clear from Yes Bank incident that Perpetual bonds are very high risk. RBI has extinguished and indicated that such bonds from Yes Bank has zero value. They may give exemption / relaxation later, that’s fine. Don’t look for higher returns. First let us look for safety of the capital. If there is no way you can get back your capital amount, whats the point in hunting for higher returns? !!
Think Think Think !!! Don’t waste your time on such investment options which would kill your investment some or other day.
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AT1in Perpetual Bonds – Should investors avoid such investment options
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Are there any such bonds?.Please eloborate
Dr.Sudhakar, These bonds are issued periodically. I am not covering them on this blog.
Interesting and Informative.