Mumbai: For mutual funds, the value of their investments in additional tier-1 (AT-1) bonds of banks has plunged more than 90% over the past 3 years, leaving lenders with fewer capital sources, as stricter regulations after the Yes Bank crisis of 2020 have prompted asset managers to stay away from these hybrid products.
Mutual funds’ investment value in these perpetual bonds was at ₹2,123 crore in December 2023, down from ₹25,057 crore in January 2020, three months before Yes Bank collapsed, data provided to ET by CRISIL Market Intelligence and Analytics showed.
Meanwhile, the share of AT-1 bonds in the assets of mutual funds dwindled to 0.29% in December 2023 versus 2.53% in January 2020, the data showed.
With demand for AT-1 bonds from one segment having now almost completely dried up, banks are said to have recently approached authorities for a change in valuation norms for these instruments, which are used by lenders to boost core equity capital. Banks have faced pressure to augment capital amid persistently strong credit growth in the economy over the past two years.
MF AVERSION
Following the turbulence in YES Bank in early 2020 which saw the RBI supersede the bank’s board, the private lender’s AT-1 bonds were written off, causing losses worth around ₹8,400 crore to retail and high-net worth individuals.
AT-1 bonds are perpetual bonds, which have certain equity-like characteristics and features which permit banks to absorb losses. Banks can write off AT-1 bonds in case of severe financial stress.
After the Yes Bank episode, the Securities and Exchanges Board of India (Sebi) provided a timeline for mutual funds to value AT-1 bonds as 100-year instruments, starting April 2023.
Prior to this, AT-1 bonds were valued according to the call options on the papers, which were 5 years or 10 years. The new norms led to a sharp decline in mutual fund investments as valuation of ultra-long-duration securities implies tremendous volatility for NAV.
“On a day when an AT-1 bond trades, the valuation shifts to a call option basis. On other days, it might shift to the 100-year valuation. The volatility of the fund increases quite a lot, “said Sandeep Bagla, CEO Trust Mutual Fund.
“Most mutual funds have duration-bound mandates. Even if we take a small exposure in AT-1 bonds, most of our limits are exhausted,” he said.
CURRENT AT-1 ISSUANCES
While the Yes Bank experience initially damaged perception of AT-1 bonds, by 2022, issuances of these bonds were well-received, particularly when the issuers were highly rated banks with robust operating metrics.
In 2023, however, banks felt the pinch of the missing mutual funds, as a sharp rise in yields on other corporate debt instruments diverted investor attention away from AT-1 bonds. Consequently, banks have had to largely pay higher rates of interest this year to draw in investors for AT-1 bonds.
Data provided to ET by rating agency ICRA showed that so far in FY24, banks have issued AT-1 bonds worth a total of Rs 13,657 crore. In FY23, banks had issued AT-1 bonds worth Rs 34,394 crore and in the year before the issuances were at Rs 29,984 crore, the data showed.
