Updated: March 12, 2020 12:55:39 pm
The objections of Additional Tier 1 (AT-1) bondholders of Yes Bank, who will be written down fully as per RBI’s reconstruction plan, are not tenable since these contracts provide for full writedown after core common equity of banks falls below a certain threshold and triggers the point of non viability, a senior government official has said.
The entire plan has been vetted legally and there were series of discussion between government, RBI and potential investors, the official said, indicating that AT-1 bonds write down “will stand the test of legal scrutiny.”
These are effectively hybrid instruments which carry higher risk when compared with secured bonds.
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What is the RBI plan for Yes Bank?
The RBI reconstruction plan for Yes Bank puts to risk nearly Rs 9,000 crore worth of AT-1 bonds, affecting bondholders including Nippon Life India AMC, mutual fund house Franklin Templeton, UTI Mutual Fund, SBI Pension Fund Trust and Indiabulls Housing Finance, among others.
The bondholders have reportedly postponed their legal challenge to the RBI’s scheme and instead plan to negotiate with the central bank regarding conversion of these instruments into equity shares after taking haircut of over 80 per cent.
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What do the rules say?
As per RBI rules based on the Basel-III framework, AT-1 bonds have principal loss absorption features, which can cause a full write-down or conversion to equity on breach of a pre-specified trigger of common Tier 1 capital ratio falling below 6.125 per cent.
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The aggregate amount to be written-down / converted for all such instruments on breaching the trigger level must be at least the amount needed to immediately return the bank’s CET1 ratio to the trigger level or, if this is not sufficient, the full principal value of the instruments, it further states.
Can banks write down AT-1 bonds?
Banks cannot use conversion or write down of AT1 instruments to support expansion of balance sheet. It is only intended to replenish the equity of a bank in the event it is depleted by losses.
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