Additional Tier-1 (AT-1) bonds – The Core IAS

Additional Tier-1 (AT-1) bonds

 

CONTEXT:

  • The haste at which the purchase of Credit Suisse, a Swiss bank, by ubs, its great rival, was arranged left investors scrambling to understand the deal. One consequence is causing particular pain. The decision to write down around sfr16bn ($17bn) in Additional-Tier 1 (at1) bonds issued by Credit Suisse has evoked fury from investors. It could even spell the end of the asset class. 

When they were created?

At1 securities are a form of “contingent-convertible” bonds created after the global financial crisis of 2007-09

Why they were created?

to prevent the need for government-funded bail-outs of precarious banks.

How they work?

Cocos, as these instruments are known, are a hybrid of bank equity (the money invested by shareholders, which absorbs any losses in the first instance) and debt (which must be repaid unless a bank runs out of equity). In good times, they act like relatively high-yield bonds. When things go sour, and trigger points are reached—such as a bank’s capital falling below certain levels relative to assets—the bonds convert to equity, cutting the bank’s debt and absorbing losses.

What are AT1 bonds?

  • AT1 bonds are unsecured bonds that have perpetual tenor.
  • These issued by banks, have no maturity date.
  • They have a call option, which can be used by the banks to buy these bonds back from investors. These bonds are typically used by banks to bolster their core or tier-1 capital.

AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds (MFs) were among the largest investors in perpetual debt instruments.

When they were created?

At1 securities are a form of “contingent-convertible” bonds created after the global financial crisis of 2007-09

What led to the write-off?

Yes Bank, which was on the verge of collapse, was placed under a moratorium by the Reserve Bank of India in March 2020 and a new management and board were appointed as part of a rescue plan worked out by the RBI. The central bank allowed a write-off of Rs 8,400 crore on AT1 bonds issued by Yes Bank after it was rescued by the State Bank of India.

Source: Indian express

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