Valuing AT1 bonds

A sudden change in the metrics will be disruptive

The concern over the market regulator’s guidelines on valuing perpetual bonds, such as additional tier-1 securities issued by banks, as 100-year bonds has its roots in the YES Bank crisis, and the Reserve Bank of India’s (RBI’s) action in that case. Investors lost heavily when the bank, prompted by the RBI, wrote off AT1 bonds worth Rs 8,400 crore, thereby putting them in a higher-risk category than even equities. The Securities and Exchange Board of India (Sebi) has rightly identified a serious problem with the valuation of these complex instruments and its suggestion will bring in more transparency to the