Sir there’s a buzz regarding AT-1 bonds taken down to zero in case of Credit Suisse & earlier it was also seen in case of Yes Bank too. What do you think was the treatment done correctly as far as the seniority of the bonds being considered in comparison to equity ? Should they’ve been converted to equity shares or were they correctly written off to zero?
Share
AT-1 bonds, also known as perpetual bonds, are a type of hybrid security that combines elements of debt and equity. These bonds are riskier than traditional bonds as they do not have a maturity date, and the issuer has the option to defer interest payments or even write off the principal.
In the case of Credit Suisse and Yes Bank, the decision to write off the AT-1 bonds to zero was in line with the regulatory framework and the terms and conditions of the bonds. As per the regulatory guidelines, AT-1 bonds are considered as quasi-equity and rank lower in priority than all other claims on the bank, including equity.
Therefore, in the event of the bank’s liquidation or resolution, AT-1 bondholders are likely to suffer losses before equity holders. Hence, the write-off of AT-1 bonds to zero is consistent with their lower priority in the capital structure.
Converting AT-1 bonds to equity shares is another option available to the issuers, but this is subject to the terms and conditions of the bond issue. It may be done to avoid the immediate write-off of the bond, but it can also dilute the existing equity shareholders’ holdings, leading to a drop in the stock price.
In conclusion, the treatment of AT-1 bonds in the case of Credit Suisse and Yes Bank was in line with the regulatory framework and the terms and conditions of the bond issue. While conversion to equity shares is another option, it is subject to the bondholders’ consent and may not always be the best course of action.