Perpetual Bond (AT1)
Additional Tier 1 (AT1) bonds are perpetual, non-cumulative, deeply subordinated instruments issued by banks under Basel III norms that can absorb losses through principal write-down or equity conversion when a bank's Common Equity Tier 1 ratio falls below a pre-specified trigger.
Under the Basel III capital adequacy framework adopted by the RBI, banks in India are required to maintain minimum capital ratios. AT1 bonds are designed to provide going-concern loss absorption: they count as Additional Tier 1 regulatory capital, filling the gap between Common Equity Tier 1 (CET1) and Tier 2 capital. Because they are perpetual (no stated maturity) and the issuer has the right — but not the obligation — to call them on specified call dates, they sit between equity and conventional senior debt in the capital hierarchy.
The risk profile of AT1 bonds is substantially higher than senior bonds of the same issuer. Key risk features include: discretionary coupon (the bank can skip coupon payments without triggering default); full principal write-down if the bank's CET1 falls below a trigger (usually 5.5 per cent in India); and in resolution, AT1 holders may receive nothing while depositors and senior bondholders are protected.
The Yes Bank AT1 write-down in March 2020 was a watershed event for India's AT1 market. When Yes Bank was placed under moratorium and subsequently reconstructed by the RBI under the SBI-led rescue plan, Yes Bank's entire Rs 8,415 crore of outstanding AT1 bonds were written down to zero. This was the first instance of an AT1 write-down in India, creating substantial losses for the retail and wealth-management clients of banks and brokers who had placed these high-yield instruments in conservative investor portfolios.
The SEBI and RBI subsequently tightened the marketing of AT1 bonds to retail investors, raising the minimum face value from Rs 10 lakh to Rs 1 crore and mandating explicit risk disclosures. Mutual funds were directed to value AT1 bonds with a 100-year residual maturity rather than the call date, increasing their modified duration and NAV volatility.
For institutional fixed income investors, AT1 spreads over comparable G-Secs reflect both credit risk and the regulatory loss-absorption feature. AT1 bonds issued by well-capitalised public sector banks have traded at tighter spreads than those of private sector banks with lower capital buffers, though the yield differential was perceived by some investors as insufficient compensation for the tail risk prior to the Yes Bank event.