YES Bank fallout: AT-1 bonds see spike in yields post RBI's proposed scheme

State Bank of India's bonds see 130 basis points jump in yields since Friday

The yields on banks' additional tier-I bonds (AT-1) -- also called perpetual bonds -- have started to see a spike in light of Reserve Bank of India's (RBI) move to write down YES Bank's bonds as part of its reconstruction scheme.

Among the AT-1 bonds issued by banks, State Bank of India's (SBI) perpetual bonds have seen 100-130 basis points (bps) spike in yields. "The jump in SBI yields is indicative of AT-1 bond market, as it is among the most traded AT-1 bonds and has the lowest risk-perception among the AT-1 bonds trading in the market," said a fund manager, requesting anonymity.

Market participants say yields for other large-sized banks' AT-1 bonds have hardened further. "For other banks, the yields would be in excess of nine per cent -- higher than SBI -- when trades are settled in the market," said a bond dealer.

According to data sourced from Bloomberg, the bid yields on SBI's AT-1 bonds spiked to 9 per cent, widening 130 basis points (bps) after the RBI declared its reconstruction scheme for YES Bank on Friday. The yields on SBI's AT-1 bonds were 7.7 per cent on Friday.  

Industry sources say that banks are re-thinking their fundraising plans through bond issuances with risk-perceptions towards AT-1 bonds becoming stronger following the YES Bank crisis.

On Saturday, IndusInd Bank decided against issuing bonds for fundraising. The bank said Monday’s board meeting, which was to consider issuances of AT-1 bonds and/or tier-2 bonds, was being put on the back-burner.

Meanwhile, to mitigate the impact of RBI's proposal to write-down YES Bank's AT-1 bonds, bondholders are seeking relief from courts.

The RBI move has cast a shadow over Rs 8,000 crore of bondholders' investments in these bonds. Mutual funds -- which have over Rs 2,700 crore of investments -- have already marked down their exposure to zero with 'D' or default grade being assigned to the bank.

Industry participants point out that yields on these bonds are hardening at a time when domestic bond market yields have been softening after US Fed's rate cut and RBI expected to keep a dovish stance to support growth. On Monday, domestic bond yields for ten-year government securities dipped to over ten-year low of 6.065 per cent.

Further, sources say that bondholders might have to eventually settle for an 80 per cent markdown. "Investors are negotiating with RBI and have proposed equity conversion as an alternative instead of a complete write-down. We should at least get treated on par with equity shareholders if not given superior treatment. This would lead to 70-80 per cent erosion on the face value of the investments, which is better than full write-off," said a fund manager.

"While there was always an element of risk in such bonds, AT-1 bonds have always got serviced in the past even by banks under prompt corrective action. However, YES Bank episode has put spotlight on the equity-like loss-absorption features of these bonds, which is now leading to re-pricing of such instruments," the fund manager added.

Factoring the risks	SBI's AT-1 bond has seen spike in yields
Date	YLD_YTM_BID*	Price (Rs)
3/5/2020	7.7	103.167
3/6/2020	7.7	103.161
3/9/2020	8.65	98.978
3/11/2020	9	96.995
Source: Bloomberg, *bid yield to maturity
Note: table shows yields for SBI 8.5% perpetual Sr II