YES Bank AT1 bond write-down reflects distinct treatment for private banks

The bailout scheme requires YES Bank to write down about Rs 8,700 crore ($1.2 billion) of outstanding AT1s

Rating agency Standard and Poor’s on Monday said the decision to write-down YES Bank’s additional tier-1 (AT1) bonds highlights the distinction in India in treatment of instruments issued by public sector banks and those from private banks. This would create losses for asset managers and raise capital costs for issuers. A complete write-down would likely raise the risk premium that investors price into Indian hybrids, said S&P Global Ratings credit analyst Deepali Chhabria.

The bailout scheme requires YES Bank to write down about Rs 8,700 crore ($1.2 billion) of outstanding AT1s. AT1 investors have filed a petition in court against the RBI, YES Bank and the government. Media reports indicate that parties are exploring an out-of-court settlement, with AT1 investors clamoring for conversion of AT1s into equity.

Under the Basel III framework, AT1 instruments are designed to be loss-absorbing tool. The holders of the debt might not get repaid in the event of financial stress. Indian regulations state that such instruments should absorb losses while the bank remains a going concern. RBI’s decision to permanently write down YES Bank’s AT1s was in line with the agency’s view that these instruments will absorb losses at private sector banks, not public sector banks, rating agency said. Indian banks’ AT1s categorically provide that any capital infusion by the government of India into the issuer as the promoter in the normal course of business may not be construed as a point of non-viability trigger. The thinking goes that, since the government owns the bank, it has the right to inject capital into the lender…

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YES Bank bondholders say will withdraw court plea if RBI accepts offer

Overall, more than Rs 8,000 crore of investments are exposed to YES Bank’s AT-1 bonds

Investors in YES Bank’s additional tier-1 (AT-1) bonds have written to Reserve Bank of India (RBI) that will accept the regulator’s offer where they can recover at least 20 per cent of investments and will subsequently withdraw petition from Bombay High Court (HC). The bondholders, in a letter sent through Axis Trustee Services, proposed that they be allotted a minimum 1,700 million shares in proportion to their current exposures.

As a result, the imputed value will work out to Rs 10 per share, which would approximately amount to Rs 1,700 crore. This will lead to “salvaging near-about 20 per cent of the principal outstanding,” the note said. Further, the bondholders have requested that the lock-in features, if any should be restricted upto 36 months in-line with the proposed new equity issuance of issuing bank. The trustee also pointed out that if the above terms are acceptable, the majority bondholders of AT-1 bonds — for which Axis Trustee is acting — shall not purse any further legal recourse and will instruct to withdraw the current petition. Axis Trustee has filed a petition at Bombay HC on behalf of the bondholders, seeking relief on RBI’s proposal for full writedown of YES Bank‘s AT-1 Bonds.

However, legal arguments are yet to begin in the court, with the matter still in pre-admission stage. Meanwhile, L&T and L&T Officers and Supervisory Staff Provident Fund also moved HC on Wednesday, seeking relief against RBI’s move. Overall, more than Rs 8,000 crore of investments are exposed to YES Bank’s AT-1 bonds.