YES Bank fallout: Axis Trustee Services seeks clarity on AT-1 bondholders

Topics YES Bank | Rana Kapoor | RBI

In a letter to the RBI, Axis Trustee has presented the central bank with alternatives that can be looked at instead of writing down the AT-1 bonds. Representative image
Axis Trustee Services, the debenture trustees for YES Bank’s additional tier-1 (AT-1) bond, has written to the Reserve Bank (RBI) seeking clarity on the fate of the AT-1 bondholders. It also asked for appropriate treatment for them in the larger interest of debt capital markets and future bankfundraising. 

RBI’s draft reconstruction scheme for YES Bank suggested a permanent write-down of these bonds outstanding as of March 5. According to the draft, the write-down is “in conformity with the extant regulations issued by the RBI based on the Basel framework”.

“We submit that such write-down of the AT-1 bonds, if given effect to, will be an arbitrary and discriminatory decision. While the Basel-III framework does legally permit write-off of the AT-1 bonds or conversion of such instruments into equity, such power ought not to be exercised in a manner in which preference is given to the common equity holders at the cost of retail as well as other investors who have directly or through mutual fund schemes and regulated financial institutions subscribed to the bonds,” Axis Trustee said. 

In a letter to the RBI, Axis Trustee has presented the central bank with alternatives that can be looked at instead of writing down the AT-1 bonds. YES Bank has issued AT-1 bonds worth Rs 8,920 crore. 

They have said, since the draft scheme of the RBI for reconstruction of YES Bank sees the matter as a going concern, the bank will always have the discretion to cancel or suspend coupon payments and delay the exercise of call option till the time the financials of the bank improves.

Also, they have said global best practices place equity as subordinate to AT-1 bonds but the RBI should consider the AT-1 bonds at par with equity if not senior. And, the AT-1 bonds can be converted into equity without affecting the size of the stake and value of investment of State Bank of India.

AT-1 bondholders have been holding on to the bonds for the past 3-4 years as long-term investors, the letter said. Moreover, in all the various scenarios in which the bonds can be converted into equity, the bondholders would be subjected to serious loss absorption in the range of 70-80 per cent of face value, however, that would be more equitable and acceptable than the proposed write down. 

Axis Trustee Services has said the complete write-down of the AT-1 bonds will shake investors’ confidence and result in negative sentiments amongst domestic as well as foreign investors. Also, an immediate negative impact to the draft proposal of writing down the AT-1 bonds of the bank has already started resulting in fresh AT-1/AT-2 bonds being aborted. 

The total outstanding AT-1 issuances by various banks stands at Rs 91,000 crore, of which private banks comprise Rs 38,000 crore as of February 23, 2020. 

Any negative impact on these bonds would increase the credit spreads across asset classes and would be detrimental to the RBI’s objective of transmission of rate cuts to the larger economy, the letter said. 

Also, Axis Trustees, in a letter to YES Bank on March 4, had expressed their concern with regard to their position on AT-1 bonds and had sought a face-to-face meeting with top executives of YES Bank.

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