The latest strike down of Credit Suisse’s AT1 bonds has introduced with it flashbacks of the same write down of YES Bank’s extra tier-1 (AT-1) bonds in March 2020.
Even as bondholders’ proceed their authorized battle in opposition to YES Bank and RBI for the write down, the worldwide priority set by the Swiss regulator for a systemically necessary financial institution, is likely to be reflective of a impolite reckoning for home bondholders who’ve alleged mis-selling on a part of the financial institution.
The main cause why YES Bank and the RBI have been dragged to courtroom over the write-down was incomplete or lack of disclosures, and the truth that the bonds have been offered to retail traders within the garb of “super FD” or high-yielding, secure debt devices with fastened returns of round 9.5 per cent at five-year tenure. The Delhi High Court, in flip, dominated that it wasn’t appropriate to jot down down the AT-1 bonds for technical causes and never mis-selling.
The Supreme Court, the place the matter has escalated to, has sought category-wise particulars of bondholders and that is attention-grabbing. YES Bank has alleged that the majority traders are extremely HNIs and high layer of traders, who have been conscious of the inherent dangers. It has additionally contested that bondholders’ competition ought to be with the intermediaries and brokers that mis-sold them the bonds and never with the issuer financial institution.
These intermediaries embody monetary establishments resembling Indiabulls Housing Finance and arrangers or processors resembling Karvy that both had lending relationships with YES Bank, or purchased AT-1 bonds in bulk in alternate for higher charges or extra enterprise. In quick, it might be a quid-pro-quo deal. But paradoxically, Indiabulls Housing Finance and Karvy at the moment are a part of the petition in opposition to YES Bank, interesting in opposition to the write-down as a result of enormous losses made on the bonds left on their books.
A 71-year-old widow and senior citizen mentioned her relationship supervisor at YES Bank suggested her to speculate her complete retirement corpus of ₹1 crore within the financial institution’s AT-1 bonds. “Nowhere in the term sheet was it mentioned that that these are Tier-I or perpetual bonds. But it clearly states that the seller is Indiabulls Housing Finance and the issuer is YES Bank,” she advised businessline.
A former YES Bank department supervisor, on situation of anonymity, mentioned retail banking branches have been requested to pitch AT-1 bonds as secure medium to long-term investments. “Because they were unavailable in the primary market, these bonds were being resold on behalf of other financial institutions, including broking agencies who had underwritten the bonds,” he defined.
Delving into particulars
According to SEBI, 1,346 particular person traders had invested roughly ₹679 crore in YES Bank’s AT-1 bonds, of which, 1,311 have been present clients of the financial institution who invested ₹663 crore in these bonds. Further, 277 clients had present FDs with the financial institution, which have been prematurely closed, and practically ₹80 crore reinvested in AT-1 bonds. Nippon Mutual Funds, Barclays, Kotak Mutual Funds, Franklin Templeton, 63 Moons, Indiabulls Housing Finance and Reliance Industries are a number of the institutional traders to the bonds.
What may complicate the matter is the dearth of a centralised database, making the secondary market gross sales of bonds troublesome to find out the precise variety of retail traders. The solely solace is that submit the YES Bank debacle, AT-1 bonds have grow to be a distinct segment play because the funding threshold was elevated to ₹1 crore from ₹10 lakh. It’s now strictly for HNIs and tremendous HNIs. Yet, the disaster at Credit Suisse has reignited the talk on whether or not these devices ought to be retail traders’ possibility, given the danger of capital wipe out.
While that is one facet, the apex courtroom has prioritised on figuring out whether or not bondholders need to be compensated, the rationale for subscribing to the bonds that they needed to be resold, what was the doable association, if in any respect, between the financial institution and these company / institutional homes. The verdict may additionally set priority to make sure what might be carried out to keep away from such a large number sooner or later.
Indian banks’ publicity to AT-1 bonds is lower than a per cent for personal banks and 1-2 per cent for PSU banks. Most AT-1 bond issuers are PSU or top-rated personal banks with low credit score and liquidity danger. But the inherent danger is that of pricing.
“If you see a five-year HDFC bond today, it’s trading around 8-8.05 per cent, whereas SBI’s AT-1 bond, with a five-year call option, is at the same level of 8.10-8.20 per cent. Despite SEBI marking perpetual bonds as 100 years, investors are treating it as a five-year instrument,” mentioned Venkatakrishnan Srinivasan, Founder and Managing Partner at Rockfort Fincap, including that AT-1 bonds ought to be priced no less than 100-200 bps increased relying on the issuer.
Where is the parity?
What can be being misplaced within the noise is that the regulator wrote down the AT-1 bonds, which have a quasi-equity attribute, however rating increased than fairness shares as per the waterfall precept of reimbursement, however allowed fairness traders to stay invested albeit with the three-year lock-in that simply ended.
While one may cite the USB-Credit Suisse deal, the distinction between the 2 is that the write-down of Credit Suisse’s AT-1 bonds and buying the financial institution at a 60 per cent low cost to the market value was a business choice taken by USB and never the regulator. To be certain, the YES Bank’s rescue was part of the reconstruction scheme formulated by the RBI to avoid wasting and revive the financial institution by capital infusion by a consortium of institutional traders led by State Bank of India.
The choice to position shareholders over bondholders is a bigger situation. A secured instrument isn’t protected, unsecured instrument had recourse. Whose curiosity is de facto being protected? The Apex courtroom verdict ought to reveal.
