What are AT-1 Bonds?

Underwhelming Subscription: State Bank of India (SBI) Faces Low Interest in AT-1 Bond Issue, Raises Only ₹3,101 Crore out of ₹10,000 Crore Target.

Market Sentiment Downturn: The tepid response is anticipated to negatively impact market sentiment, posing challenges for additional fundraising efforts among other PSU banks and potentially causing delays in their financial plans.

About AT -1 Bonds

Additional Tier 1 bonds, are a type of perpetual debt instrument.
These bonds are perpetual in nature — they do not carry any maturity date.
Banks use these Bonds to augment their core equity base and thus comply with Basel III norms.
Banks have a call option that permits them to redeem these bonds after a certain period, say, 5 or 10 years.
These bonds are subordinate to all other debt and senior only to equity.

What are AT-1 Bonds?

AT-1 bonds were first conceptualized after the disastrous global financial crisis of 2008, which led to the closure of many banks.
AT-1 bonds are like standard bonds but have a comparatively higher rate of interests. They are also listed and traded on stock exchanges. This means that the bondholder can sell the bond in the secondary market if they require funds.

Banks issuing AT-11 bonds can even reduce the bonds’ face value.
AT-1 bonds are regulated by the Reserve Bank of India (RBI). RBI can instruct a bank to write-off its AT-1 bonds without consulting investors during a bailout.

The AT1 origin story

Originating in the aftermath of the 2008 financial crisis, AT1 bonds emerged as a regulatory response aimed at redistributing risk away from taxpayers and bolstering the capital reserves of financial institutions. The intent was to enhance the resilience of these institutions in anticipation of potential future crises. Introduced under the Basel accord, AT1 bonds play a crucial role in safeguarding depositors by providing failing banks with a mechanism to absorb losses, thereby contributing to the overall stability of the financial system.

Key Features and Importance of AT1 Bonds

Perpetual Nature: AT-1 bonds do not have a maturity date. Instead, they include call options that allow banks to redeem them after a specific period, usually five or ten years. Banks can choose to pay only interest indefinitely without redeeming the bonds.
Flexibility in Interest Payments:Banks can skip interest payments or reduce face value of AT-1 bonds if capital ratios fall.
Regulatory Intervention: The RBI can cancel a bank’s AT-1 bonds without investor consultation during financial distress.

What Norms regulate AT-1 Bonds?

In India, the regulation of AT-1 Bonds falls under Basel III guidelines. These norms mandate that Indian banks maintain a capital ratio of 11.5%, with 8% allocated to tier 1 capital and the remaining portion to tier 2 capital.

It is essential to recognize that AT-1 bonds are categorized as “unsecured subordinated perpetual non-convertible bonds” and form an integral part of a bank’s permanent capital. The issuance of AT-1 bonds by banks serves the purpose of complying with Basel III requirements related to equity capital.

High Return High-Risk Bonds

Although AT-1 bonds offer investors higher returns, they come with greater risks compared to other types of debt investments. It’s important to note that these bonds can be subject to a reduction in value by banks, as directed by the Reserve Bank of India (RBI), in the unfortunate event of institutional failure. Considering them as high-risk financial instruments results from the fact that in situations where a bank faces non-viability, AT-1 bonds may be the initial category of debt subject to write-down.

FAQs Related with AT-1 Bonds

Ques 1: What are AT-1 bonds?

Answer: AT-1 bonds are perpetual debt instruments issued by banks to raise capital, with no fixed maturity.

Ques 2: What is the purpose of AT-1 bonds?

Answer: AT-1 bonds are intended to bolster banks’ capital base and meet regulatory capital requirements by raising Tier-1 capital.

Ques 3: What are the features of AT-1 bonds?

Answer: AT-1 bonds have certain unique features compared to traditional bonds. They have no fixed maturity date and can be perpetual in nature. AT-1 bonds include a call option, enabling the issuer to cancel or call back the bond at a designated call date or in specific situations. Banks have the discretion to skip interest payments on AT-1 bonds if they incur losses.