PNB, DCB Bank, IOB To Offer AT1 Bonds; What Are AT1 Bonds, Are They Safe?

Punjab National Bank (PNB), DCB Bank and Indian Overseas Bank (IOB) may have to offer higher interest rates on their bonds amid the global banking crisis, according to an Economic Times report. PNB will begin bidding for its AT1 bonds on March 24, as part of efforts to raise a base issue of Rs 500 crore and a green shoe issue of Rs 1,500 crore.

Indian Overseas Bank (IOB) is planning to raise Tier II capital with a base issue of Rs 200 crore and a green shoe of Rs 800 crore, while DCB is preparing to raise Tier II bonds with a base issue of Rs 250 crore and a green shoe of Rs 50 crore.

What Are AT-1 Bonds?

AT1 bonds are a type of perpetual debt instrument that do not carry any maturity date. Banks use them to augment their core equity base and thus comply with Basel-III norms. These bonds were introduced by the Basel accord after the global financial crisis to protect depositors.

Are AT-1 Bonds Safe for Investors?

The AT-1 bonds are seen as high-risk instruments, as these bonds can be written down by banks under the directions of the Reserve Bank of India (RBI) in the event of an institutional failure. AT1 bonds are usually the first part of a bank’s overall debt that will be written down in case of non-viability.

Last week, the Supreme Court stayed the Bombay High Court order which had set aside the writing down of Yes Bank’s AT-1 bonds of more than Rs 8,300 crore in January. The apex court also issued a notice to bondholders.

The Bombay High Court quashed a decision taken by the Yes Bank Administrator on March 14, 2020, to write off Additional Tier 1 (AT-1) bonds noting the Administrator did not have the authority to take such a decision.

AT1 bonds worth Rs 8,414 crore were written off fully during the Yes Bank reconstruction scheme in March 2020.

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