AT-1 bonds back in news after Yes Bank case: Why banks issue them, how investors earn returns | Don'ts to avoid losses

AT-1 bonds are back in focus after the Supreme Court upheld a Bombay High Court ruling quashing Yes Bank's 2020 write-off of bonds worth ₹8,415 crore. The verdict marks a landmark win for bondholders whose investments were cancelled during the bank's rescue facilitated six years ago.

Yes Bank plunged into a liquidity crisis in March 2020 as bad loans swelled, prompting the Reserve Bank of India (RBI) to take control of the lender and freeze withdrawals. To stabilise the bank, a consortium of lenders led by the State Bank of India (SBI) was assembled to to inject fresh equity capital.

As part of the exercise, the bank’s administrator wrote down around ₹8,415 crore worth of Additional Tier-1 (AT-1) bonds, prompting Axis Trustee Services and other bondholders to challenge the move in court.

What are AT-1 bonds, how investors make returns?

Banks issue AT-1 bonds under Basel III norms to strengthen their core Tier-1 capital, absorb financial losses, and support lending growth without diluting existing equity shareholding. While these bonds can be attractive in terms of interest rates, they also carry significant risks.

“To attract capital, these instruments offer higher interest rates than conventional fixed-income products. However, AT-1 bonds are perpetual with no fixed maturity date, and banks retain the right to cancel interest payments without obligation to pay them later,” according to K Sai Teja, an advocate at the Supreme Court of India.

He further explained that if a bank’s common equity Tier-1 (CET1) ratio falls below regulatory thresholds, the principal can be partially or completely written down, as demonstrated during the 2020 Yes Bank crisis.