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MUMBAI: The Reserve Bank of India’s (RBI) decision to extinguish Additional Tier 1 (AT1) bonds of Yes Bank will hurt a large number of retail and other investors (through write-offs in mutual funds and insurance funds), bank treasuries and HNIs. In addition, RBI’s decision has also increased uncertainty about these bonds, which are leading to a drop in the prices of these bonds issued by other banks, analysts said. As prices of these bonds drop, investors will see the value of their investments also go down.
According to Suman Chowdhury, president — ratings, Acuité Ratings & Research, the RBI decision on Yes Bank’s AT1 bonds strongly validates the inherent risk in these bonds or Innovative Perpetual Debt Instruments (IPDI), which form part of the Tier-1 capital of a bank. “This is for the first time in the history of the Indian banking sector that a bank’s T1 bonds are being written down at the ‘point of non-viability’ (PONV) that is the investors have to take a hit on both principal and the balance interest payments,” he said in a note.
Clearly, the investors in such bonds, mainly the MFs and banks’ treasuries will need to take a significant hit due to this development. “Acuité also believes that this will limit the market for AT1 bonds in India only to issuances by a few large public sector banks and further, the pricing will see increased differential with that of Tier-2 bonds to reflect the differential risk,” Chowdhury said.
All the mutual funds like Nippon India MF, Franklin Templeton MF, UTI MF, Kotak MF, and some others, which were holding these bonds by Yes Bank, have already written off their investments. According to a report by domestic brokerage Batlivala & Karani Securities, of about Rs 94,000 crore AT1 bonds currently being held by various institutions, which have been issued by various PSU and private banks, nearly 42% or about Rs 38,000 crore is with several mutual funds. The rest are with insurance companies, HUFs, trusts, and others.
“As the market’s trust on AT1 bonds is sure to wane after the RBI decision to extinguish Yes Bank’s AT1 bonds, the prices of these bonds will fall (and yields will rise), the NAVs of funds will take a hit. Also, going forward “market will differentiate between good and bad credit, and accordingly we will see yield spreads widening across names but clearly differentiating between strong and weaker names,” the report by B&K Securities noted.
From MF perspective, after 100% markdown of Yes Bank bonds, we believe IndusInd Bank’s AT1 bonds are likely to face the major brunt (due to spread widening),” it said. Soon after the RBI decision on Thursday evening, IndusInd Bank had postponed a scheduled board meeting that was to deliberate issuance of AT1 bonds, among other agendas, by the lender.
Source: Times of india
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