Rollover risks rise for additional tier-I bonds after YES Bank crisis

The additional tier-I (AT-I) bond market, which relies heavily on rollover of bonds, is likely to face challenges in securing rollover funds after the Reserve Bank of India (RBI) proposed write-down of YES Bank's bonds. 

According to a note by ICRA, the RBI move can have negative repercussions for the entire AT-1 bond market, which currently stands at around Rs 93,669 crore. Most of these bonds were issued in FY17 and FY18 with call dates after five years. 

 

 

These are due for calls in FY22 and FY23. With the premium on these bonds expected to spike because of the regulator's treatment of YES Bank's bonds, banks may decide against exercising call option at higher yields to replace existing bonds. 

But, this could lead to a backlash from investors, who have subscribed to these bonds with a 5-year perspective. In FY22, AT-1 bonds of Rs 34,290 crore are due for call, while bonds of Rs 30,700 crore are due for call in FY23, according to ICRA's estimates. 

At present, these bonds get issued at a premium of 2-3 per cent over risk-free return. This is because of the higher risk involved as the issuing bank has always the discretion to cancel coupon payments. The write-down is also a risk put in the information memoranda of these bonds.