Additional Tier 1 Bonds [AT1 Bond]
By : Neha Dhyani
Updated : Mar 27, 2022, 7:16
Bonds are units of corporate debt which are issued and used as tradable assets by companies. Additional Tier 1 Bonds or AT1 bonds are unsecured bonds with no maturity date. These bonds have the call option, and thus, the issuer of the bonds can call or redeem the bonds.
Tier 1 bonds are mainly used to raise long term capital. In the case of a crisis, the RBI can instruct the troubled bank to write off additional tier 1 bond without consulting the investors.
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.
The 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 pay-outs 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 state 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. The 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.
Q.2. What changes did SEBI make in Additional Tier 1 Bonds recently?
Recently, SEBI has instructed mutual funds to value Tier 1 Bonds as a 100-year instrument. Mutual funds now assume that these bonds can be redeemed in 100 years. SEBI believes that these bonds are riskier than debt instruments, so it has instructed to limit their ownership by 10% of the capital of the scheme.
Q.3. Who issues AT1 Bonds?
The Reserve Bank of India issues and regulates Additional Tier 1 Bonds.
Q.4. Are Additional Tier 1 Bonds a debt or equity?
AT1 bonds are a direct, subordinate and unsecured debt in the issuing bank. These bonds rank lower than the claims of all creditors and are only above common equity.