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AT1 bonds: what should you know before investing in them?

Yes Bank crisis is not new to us and seems to have become an everyday topic in news. Early in March 2020, the RBI had permitted the write-down of Yes Bank AT1 bonds as part of the entity’s revival plan. While most investors including the depositors took this development as a breather, the AT1 bond holders themselves were not very happy about it.

In this article we’ll see what AT1 bonds are and why did these create unrest among the investors.

What are AT1 bonds?
Banks issue AT1 bonds to ensure that they conform with Basel III norms. Additional Tier 1 Bonds or AT1 bonds are unsecured, perpetual and non-convertible bonds. Here’s more to help you understand the meaning of AT1 bonds.

Why do banks issue AT1 bonds?
Short for Additional Tier-1 Bonds, AT1 bonds came into being after global banks came together to formulate Basel III norms. Now, these norms aim at safeguarding the international banking system.

Even the collapse of a single bank can wreak havoc in an economy. Needless to say what the collapse of an entire banking system of a country or globe means. Recall the state of the US’ banking sector during the 2008 crisis. Bad, right? The fallout literally hit the entire globe. That’s why banks from across the countries are required to meet BASEL III norms. So that the international banking sector stays resilient during financial and economic stress.

One of the most important Basel III norms is that a bank needs to raise capital internally before doing so externally via deposits and loans. As per this norm, Indian banks are required to maintain a total capital ratio of 11.5%. 8% of this is called Tier 1 capital, which essentially comprises of funds raised by the bank internally. Examples include are equity shares and reserves. The remaining 1.5% of the bank’s capital is called Tier 2 capital that comprises of hybrid instruments and supplementary reserves.

Tier 1 capital remains with the bank permanently or unless they decide to redeem them. Tier 2 capital can change hands. AT1 bonds form part of such Tier 1 capital and have unique features. Let us examine in detail.

AT1 bonds features
Unlike a normal bond, the Additional Tier bonds have unique and specialized features as listed below. Here’s how AT1 bonds work.

AT1 bonds are perpetual and non-redeemable but have a call option
As mentioned before, AT1 bonds are perpetual, meaning you as an investor cannot redeem or sell these bonds. In fact, they don’t even carry a maturity date. However, these specialized bonds have a call option that allows the issuing bank to redeem them after 5 or 10 yrs. Meaning only the bank can decide whether to redeem the bonds or not and it will only go ahead under special circumstances. That said, a bank can redeem these bonds even before 5 or 10 years thanks to a particular clause in the agreement that allows the bank to repay AT1 bonds prematurely. Continue reading here.

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Aradhana Gotur

Aradhana Gotur

Lives in both own and parallel universes and loves nature, music, and words (that turn into actions)

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