Tighter norms behind low appetite for AT-1 bonds Mutual Funds: Report
1 min read 30 May 2023, 08:52 AM ISTAT-1 bonds, also known as Additional Tier 1 bonds, are a type of debt instrument that banks issue to meet their capital requirements under Basel III regulations
PremiumThe 2020 Yes Bank crisis has reduced mutual funds (MFs) appetite for AT-1 bonds. Once among the biggest buyers of AT-1 bonds, MFs are now just about a fifth of what it earlier was, Economic Times reported.
“MF investments in AT-1 bonds crashed to ₹5,382 crore in April 2023, from ₹25,057 crore in January 2020," ET reported.
Earlier, the Securities and Exchange Board of India (Sebi) capped mutual fund investments in debt instruments, especially with reference to AT1 (Additional Tier-1) bonds. Accordingly, no mutual fund scheme will be allowed to invest more than 10% of its debt assets in such bonds and not more than 5% in the bonds of a single issuer
What are AT-1 bonds?
AT-1 bonds, also known as Additional Tier 1 bonds, are a type of debt instrument that banks issue to meet their capital requirements under Basel III regulations. These bonds have no maturity date and are perpetual. They can be called or redeemed by the issuer at their discretion.
AT-1 bonds are riskier
However, they are considered to be high-risk instruments because they absorb losses in the event of a bank's financial distress, and can even be written off or converted into equity if certain trigger events occur. This makes them riskier than other types of debt instruments, such as senior bonds or deposits, which are usually protected from write-downs.
The AT-1 bonds of India's Yes Bank were written down in March 2020 after the Reserve Bank of India initiated a restructuring of the lender with some value attributed to the bank's equity.
