The Yes Bank AT1 bonds fiasco is a problem where investors lost a lot of money because the bonds didn’t seem to be worth as much as they thought.

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AT1 bonds are made of different types of securities than regular corporate bonds. AT1 bonds are typically less risky and offer a higher return than regular corporate bonds.

Banks use AT1 bonds to show that they have more of their own, permanent capital than they do borrowed money. This means that if something bad happens and the bank can’t pay back all of their debts, their AT1 bonds will still be safe.

To make up for the fact that banks have less capital than they used to, they were allowed to issue special type of bonds called AT1 bonds to investors. AT1 bonds pay regular interest, but they don’t have a specific expiration date like other bonds. They are seen as a permanent part of the bank’s capital, like equity.

Banks usually offer a call option on five-year bonds after they are issued. This means that the holder of the bond can ask the bank to sell the bond back to them at a set price, usually a higher price than the original purchase price. AT1 bonds are also different from regular bonds in other ways.

If the bank issuing the bonds is struggling, it has the discretion to reduce or stop paying interest on them. If this happens, the bonds could technically be worth less than the original price. If the RBI (the government agency that oversees banks) believes the bank is in danger of going bankrupt, it may order the company to write down the value of the bonds. This makes the AT1 bonds much riskier than regular corporate bonds.

The Yes Bank AT1 bond issue is about issuing a new type of bond that investors can use to make money. The bond will pay out interest every month, and it will be backed by the bank’s assets.

Yes Bank had a lot of problems in September and October of 2019, and the RBI decided to step in before the bank got even worse. On March 5, 2020, they stopped people from withdrawing their money, and appointed an administrator to help with the bank’s problems. On April 1, 2020, the RBI decided that Yes Bank’s AT1 bond obligations (money that it owes to investors) would be written off.

Investors in Yes Bank’s AT1 bonds were surprised when the company wrote off a large amount of money.

Some people who bought AT1 bonds from Yes Bank were not happy because they didn’t know about the principal or coupon write-off features. They also didn’t know that the bonds were perpetual.

The Securities and Exchange Board of India (SEBI) investigated that Yes Bank officials sold bonds to people who were not suitable investors, like seniors, and institutional investors were selling them to regular people. They passed orders and penalties on Yes Bank top executives, but investors in the bonds also fought to keep the bonds from being written off. Last week, the Bombay High Court passed an order staying the write-off of Yes Bank’s AT1 bonds on technical grounds. It’s not clear yet if Yes Bank will appeal this decision.

Yes Bank may have to change some of its policies because a court order says that their bank accounts in Bombay should be closed. This could mean that Yes Bank’s finances would be affected.

The court order requires Yes Bank to value its Tier 1 bonds at over $8.3 billion, which would reduce its equity capital by 3%. If Yes Bank decides to repay the bonds, its equity capital would take another hit, but it would be able to make up for it by issuing new shares or bonds. There is also a chance that Tier 1 bond holders will be allowed to convert their holdings into Yes Bank shares, so there would be no real impact.

Are these bonds safe for investors? AT1 bonds are in the safe investment category. Which category of investors should invest in them?

The RBI and banks have the power to decide how much interest they will pay on their bonds, whether they will exercise their call option (which means they can sell the bond early) or simply write off the bond’s entire value. This makes AT1 bonds unsuitable for regular investors, who want to know that their money will always be invested and will receive interest.

After the Yes Bank scandal, SEBI ruled that AT1 bonds should only be sold to institutional investors in minimum ticket sizes of ₹1 crore. But older tranches of AT1 bonds continue to trade at lower lot sizes of ₹10 lakh in the market, which are offered to individual investors by brokers as “high yield” FD substitutes. Only investors willing to take the risk of capital losses with a sufficiently high net worth to invest such a large sum should even consider them.

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