Yes Bank's additional Tier 1 (AT1) bondholders are hoping to get their interest payments back after India's Supreme Court overturned the bank's 2020 write-off of these securities. But according to people familiar with the matter, the lender is unlikely to pay the coupons due this year while it seeks a review of the ruling.
The development is the latest twist in a long-running saga that has left many retail and institutional investors nursing losses and waiting for clarity on their claims.
What are AT1 bonds?
AT1 bonds, also known as contingent convertible bonds (CoCos), are a type of bank debt designed to absorb losses during financial stress. They are meant to convert into equity or be written off if a bank's capital falls below a certain level. In exchange for this higher risk, they typically offer higher interest rates than regular bonds.
However, the trade-off is that the bank can cancel coupon payments at any time, and in extreme cases, write off the principal entirely. This is what happened to Yes Bank during its 2020 rescue, when the lender wrote off 84 billion Indian rupees (about $886 million) of AT1 bonds, wiping out investors' principal and stopping coupon payments.
The Supreme Court ruling and its aftermath
In a significant decision, India's Supreme Court overturned that write-off, ruling that it was invalid. This gave AT1 bondholders hope that they might recover their money and receive the missed coupon payments. However, the bank is reportedly seeking a review of the ruling, which means the legal process is not yet over.
Sources told Reuters that Yes Bank is unlikely to pay the coupons due this year while it pursues this review. This suggests that even though the court has ruled in favor of bondholders, the practical outcome may still be delayed.
What this means for investors
For investors holding Yes Bank's AT1 bonds, this news is a reminder that legal victories do not always translate into immediate cash. The bank's decision to seek a review means that coupon payments could remain suspended for some time, and the final resolution may depend on further court proceedings.
It also highlights the inherent risks of AT1 bonds. While they offer higher yields, they come with the possibility of coupon cancellation and principal write-downs. Investors who bought these bonds during the bank's crisis years took on significant risk, and the outcome remains uncertain.
For the broader market, this case is being watched closely because it could set a precedent for how AT1 bonds are treated in India. If the Supreme Court's ruling stands, it might give bondholders more protection in future stress situations. But if the review leads to a different outcome, it could reinforce the idea that AT1 investors bear the first losses when a bank fails.
Context: India's banking and bond market
The Yes Bank case comes at a time when India's banking sector is navigating a complex environment. The Reserve Bank of India has been tightening monetary policy to combat inflation, which has pushed up bond yields across the market. As India's bond yields climb, investors are paying close attention to credit risk and the health of financial institutions.
Yes Bank itself has been working to rebuild its balance sheet since the 2020 rescue, which involved a government-backed bailout and a change in management. The bank has raised capital and improved its financial position, but the AT1 bond issue remains a lingering overhang.
The outcome of the review could also affect investor sentiment toward other Indian banks that have issued AT1 bonds. While most banks are in a stronger position now, the legal uncertainty around Yes Bank's case may make some investors more cautious about these instruments.
What to watch next
Investors should keep an eye on the Supreme Court's review proceedings and any statements from Yes Bank about its plans for the AT1 bonds. The bank's next earnings report may also provide clues about how it intends to handle the situation.
In the meantime, those holding AT1 bonds should be prepared for continued uncertainty. As the central bank signals more rate hikes, the broader market environment remains challenging, and the resolution of this case could take months.
For everyday investors, the key takeaway is that AT1 bonds are not like regular bonds. They are complex instruments with significant risks, and even a favorable court ruling does not guarantee timely payments. As always, it's important to understand what you're investing in and to weigh the potential rewards against the risks.
