AT1 Bonds, or Additional Tier 1 bonds, are unsecured bonds with no maturity date used by banks to increase their equity base and comply with Base III norms. These bonds were introduced during the global financial crisis by the Basel accord. AT1 bonds are a type of perpetual debt instrument with no maturity date.
AT1 Bonds are mainly used to raise long-term capital. They offer high returns but at a higher risk. In the case of a crisis, the RBI can instruct the troubled bank to write off this bond without consulting the investors. Read more about AT1 bonds here.
What are AT1 Bonds?
AT1 bonds are a debt instrument through which a large capital can be raised. Unlike other bonds, these do not have a maturity date, which means that the issuers do not have to pay the principal amount. The primary holder of these bonds is mutual funds. Learn more about these bonds:
- AT1 bonds do not have a maturity date.
- These bonds can bring high returns.
- These bonds come with higher risks.
- Additional Tier 1 bonds are not suitable for those looking for steady returns.
Full Form of AT1 Bonds
The full form of AT1 Bonds is Additional Tier 1 Bonds. The bonds are a debt instrument that can be redeemed anytime in a period of 100 years. In other words, they are perpetual. In case of financial crises, banks rely on AT1 bonds to raise capital.
Name of bond
Additional Tier 1
Key Features of AT1 Bonds
- AT1 Bonds are also known as perpetual bonds. They don't have any expiration date but have the call option.
- Banks issue tier 1 bonds to meet their core capital in accordance with the Basel-III norms.
- AT1 Bonds pay a higher rate of interest as compared to other bonds.
- These bonds can be issued by banks only on electronic platforms.
- The bank issuing the AT1 bonds has the option to call back the bonds or repay the principal after some time.
- The minimum allotment size and trading lot size should be Rs. 1 Crore.
- Investors cannot return AT1 bonds and get the money, as the holders have no put option.
- AT1 bondholders can sell the bonds in the secondary market if in need of money. These bonds are tradable and can be used in exchanges.
- The interest payout of tier 1 bonds can be skipped for a particular year without having the creditors questioning bondholders for defaulting the interest payouts.
AT1 Bonds Regulation
Securities and Exchange Board of India (SEBI) laid out the Base III norms for AT1 bonds. As per SEBI's regulations, the maturity date of these bonds is 100 years. Since these bonds are also risky, SEBI has directed Mutual Funds to limit the Additional Tier 1 bond ownership. As per this regulation, the Mutual Funds are only supposed to add AT1 bonds as 10% of their total assets.
Base III Norms for Additional Tier 1 Bonds
Base III norms refer to a set of reforms set to regulate and supervise the banking sector after the global financial crisis of 2008. As per these norms, banks are required to maintain a set level of capital as an emergency fund. Base III norms divide the bank's capital into Tier 1 and Tier 2. Tier 1 is further divided into Common Equity Tier 1 and Additional Tier 1 (AT1 bonds) capital. If Tier 1 capital falls below the set limit, AT1 bonds are written off, and the bank receives capital.
Risk Factors for Investors of AT1 Bonds
- No Option to Call: AT1 bonds allow the issuer to redeem them at the end of a specific period of time (mostly 5 or 10 years) when they are no longer in need of money. The voluntary calling option of tier bonds by the bank essentially takes away the power from the investors in having a say in this.
- Skipping the Interest Pay-outs: Banks can skip the interest payouts without answering the creditors. As the major purpose of AT1 bonds is to shore up the equity capital of banks, the RBI provides a lot of liberty to the bank in paying back the interests if the Capital Equity Tier 1 ratio falls below 8%.
- Early Recall of the bonds: Though the issuing banks of tier 1 bonds can be called after a period of 5 or 10 years, sometimes, banks can also redeem them sooner than the expected time if any issues occur.
- Writing off the Principal: The term 'principal loss absorption' in AT1 bonds contracts clearly states that banks are allowed to write-off their principal amount either temporarily or permanently if the CET goes below 8%.
Additional Tier 1 Bonds are mainly issued to shore up the core capital of the bank, as instructed by Basel III Norms. The market of AT1 Bonds fell after the Yes Bank write-off. Investors now treat these bonds with caution.
FAQs on Additional Tier 1 Bonds
Q.1. What are AT1 bonds?
AT1 bonds are unsecured bonds that are perpetual in nature. These bonds have a higher interest rate than other bonds. These are mainly used by banks to write off their debts in case of financial emergency.
Q2. What is the full form of AT1 bonds?
AT1 bonds full form is Additional Tier 1 bonds. These bonds are a sort of perpetual debt instrument with no maturity date. Therefore, they can be used by banks to raise capital at any point in time.
Q3. Who regulates AT1 bonds?
AT1 bonds are regulated by the Reserve Bank of India. RBI ensures that these bonds follow the Base III norms laid down by SEBI. It believes that AT1 bonds are riskier than debt instruments, so it has instructed to limit their ownership by 10% of the capital of the scheme.
Q4. Are AT1 bonds long term?
Yes, AT1 bonds are long term, with a maturity period of 100 years. It means that they can be written off anytime during a period of 100 years. Because of such a long maturity period, AT1 bonds are often called perpetual bonds.