Nippon Mutual Fund, which has a significant investment in YES Bank’s AT1 bonds, has marked down the value to zero. So, investors of the MF scheme, and those who have invested in these bonds directly, losing out now?
What are AT1 bonds?
Additional tier 1 bonds, or AT 1 bonds, also known as perpetual bonds, are quasi debt. While these bonds carry a higher return (interest rate is higher than AAA-rated tier II bonds) for investors, there is also a higher risk attached to them.
Over the past few years, many banks have raised capital through these bonds to comply with Basel III norms stipulating higher tier I capital.
These bonds have no maturity date. The coupon payment to the investor continues till the time the issuer decides to call back the bonds. Though these bonds promise a higher yield, there is some risk. One, the issuing bank is not under obligation to continue with coupon payments if it is making a loss. Two, when the bank is not able to maintain a common equity tier I ratio, the bonds can be written down or converted to equity.
While earlier it was only HNIs who flocked to perpetual bonds, of late, in the chase for higher yield, even retail investors have been purchasing them from the market. Many debt and hybrid funds also have exposure to these schemes today.
These bonds are also rated by credit rating agencies, and are generally a few notches below the secured bonds of the same issuer.
Nippon MF’s move
Nippon Mutual Fund’s investment is in the AT1 bonds of YES Bank. As per the information memorandum of AT1 bonds, in the case of reconstitution or amalgamation of the bank under Section 45 of the Banking Regulation Act, 1949, the bank will be deemed as non-viable, triggering a writedown or conversion of AT1 bonds into equity.
However, while moving the bank under moratorium by itself doesn’t erode all the value of its AT1 bonds, fund houses may want to take a precaution and mark down their value. This is what Nippon Mutual Fund has done.
Investors have to note that this move doesn’t mean that the MF is writing off the amount payable by YES Bank. It has, however, restricted fresh inflows into the scheme to ₹2 lakh per day till further notice.