MFs to take RBI to court over AT1 bonds
MUMBAI: Mutual funds plan to challenge the central bank’s resolution plan for Yes Bank, which envisages a write-off of the lender’s additional tier 1 (AT1) bonds, as they claim that legal norms require bond owners to be given priority over shareholders when it comes to repayments, according to two senior executives in the mutual fund industry.
The Reserve Bank of India’s (RBI) resolution plan allows equity holders of Yes Bank to retain some value while completely writing off AT1 bonds.
“If Basel III Additional Tier 1 bonds are written down to zero, what about equity? Technically, AT1 should be senior to equity,” tweeted Sivakumar R., head, fixed income, at Axis Mutual Fund. “By all means write down AT1 to zero. But equity must be written down too. Otherwise, what is the meaning of senior?”
As part of the rescue plan for Yes Bank, State Bank of India (SBI) will infuse ₹2,450 crore into Yes Bank for a 49% stake, ascribing the troubled lender a market value of about ₹5,000 crore. However, Yes Bank has issued AT1 Bonds of around ₹10,000 crore.
These will be marked down to zero under the RBI draft resolution plan even as the bank retains a positive market capitalisation of ₹5,000 crore.
A chief executive of a mutual fund house said on condition of anonymity that he would be seeking an opinion from his legal team on this matter on Monday.
“If AT1 bonds are treated as subordinate to equity as seems to have happened in this case, the entire set of AT1s in the market will get repriced. It can send shockwaves in the market,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt Ltd, highlighting the danger to mutual funds exposed to other issuers of AT1 bonds.
RBI’s Yes Bank rescue plan will not only hurt institutional investors that own the AT1 bonds but retail investors as well.
Meanwhile, Indiabulls Housing Finance Ltd on Sunday said Yes Bank owes it ₹662 crore, which was invested in the bank’s AT-1 bonds.
In a stock exchange filing, Indiabulls said it had made the investments in 2017 as part of its treasury management.
Gopika Gopakumar contributed to this story.
RBI’S RESOLUTION PLAN ALLOWS EQUITY HOLDERS OF YES BANK TO RETAIN SOME VALUE WHILE COMPLETELY WRITING OFF AT1 BONDS