Retail investors big losers in Yes Bank AT1 bond write down

Sarkaritel
By Sarkaritel March 17, 2020 07:08


New Delhi, March 17  Arnab (name changed) put his lifetime savings into additional tier 1 or AT1 bonds of Yes Bank in 2018 after he was assured that such investment was as safe as a bank fixed deposit but offered much better returns.

For the first year, Arnab received his interest on his investment on time. Encouraged, he put the balance of his savings into the instrument. But all his hopes dashed when news came that the bank will write down entire Rs 8,415 crore investments made in AT1 bonds under Yes Bank restructuring plan, effectively bringing his savings to a naught.

What Arnab has seen through his two year journey over bond investment made in Yes Bank is similar to lakhs of other retail investors who are indirect subscribers of these bonds.

The mutual fund industry as a whole had an exposure of about Rs 2,730 crore (as on 29 February) to Yes Bank debt, much of it to AT1 bonds, according to data from RupeeVest, an online mutual funds distributor.

What makes the issue problematic is that large chunk of this investment in debt MF is from retail investors that may emerge biggest losers in the Yes Bank restructuring. AMFI data also suggest that debt (including liquid) fund investments constituted around 30 per cent of total retail and HNI asset under management (AUM), meaning bigger trouble for this segment in the restructuring plan for the private sector bank.

On top of that, Rs 466 crore have been invested in these bonds by retail investors directly. If they are written off, it will impact hundreds of thousands of investors.

Yes Bank’s additional tier 1 (AT1) bonds worth Rs 8,415 crore are being written down to zero under the cash-strapped private lender restructuring plan that also includes investment by private banks to the tune of Rs 3,950 crore in Yes Bank’s equity and public sector lender SBI picking upto 49 per cent stake with a commitment to invest Rs 7,250 crore.

The write down is being done as per the globally accepted Basel-III norms that mandate writing down of such bonds in the wake of an emergency.

While the government and the RBI have assured that all the depositors’ money in the bank will be protected and if need, be the banking regulator may provide additional liquidity support to Yes Bank, bond holders have been left in the lurch.

“The bank (Yes Bank) has decided to write down AT1 bond. This is as per the terms of the contract between the bank and the investor,” RBI Governor Shaktikanta Das said while mediapersons about steps RBI is taking to maintain liquidity in the financial system and currency market in wake on coronavirus spread.

“A lot of misselling happened on Yes Bank’s AT1 bonds that were projected as a safe investment instrument giving higher returns. This lured a lot of retail investors also to buy these bonds. Government should not leave these investors high and dry and look at some mechanism that losses to this segment are minimised,” said another retail investor of Yes Bank bonds.

The losses on investment is expected to be fairly widespread as apart from mutual funds, several hundreds of crores of retail investor money was invested in these bonds by insurance companies and pension funds.

What the mutual fund industry fears is that writing down of Yes Bank AT1 bonds may cause panic redemptions, even in situations where it is not warranted. This would severely affect investors’ confidence in debt markets and financial institutions.

Mutual funds owned by Nippon, Kotak, Franklin and firms like Reliance Industries, Barclays Bank, Bajaj Allianz including 34 institutions and pension funds have also invested in Yes Bank bonds. Nippon MF is expected to lose a whopping Rs 2,500 crore, Franklin MF Rs 590 crore, Barclays Bank Rs 246 crore, Kotak MF Rs 130 crore and RIL Rs 100 crore, documents related to such investment showed.

Other institutions which stand to lose are Reliance Nippon Life Insurance, Larsen and Toubro, UTI MF, and Bharti Axa. Even pension funds like the State Bank of India employees pension fund, the Larsen and Toubro officers and supervisory staff pension fund, the NPS trust fund, Indian Oil Corporation employees provident fund (refineries division), National Hydroelectric Power Corporation Ltd (NHPC) employees provident fund also stand to lose crores of pension money.

“We have to realise that AT1 perpetual bonds are more in the nature of an equity product with inbuilt risk factors. Investors should exercise caution making such investment or be ready to face consequences coming from investments in Yes Bank,” said a banking sector analyst.

AT-1 Bonds in India have emerged as an important source of capital for scheduled commercial banks. Banks, both PSU and private, regularly issue AT-1 bonds in the debt market to shore up their Tier I Capital. After the Yes Bank write down, the market for such instruments may also dry up.

Sarkaritel
By Sarkaritel March 17, 2020 07:08