Additional Tier-1 (AT1) bonds

In News

• Recently, the Bombay High Court Friday quashed the write-off of Additional Tier-1 (AT1) bonds issued by Yes Bank Ltd.

More about the news

• SEBI investigation:
  • A Sebi probe found that the bank facilitated the selling of AT1 bonds from institutional investors to individual investors. 
  • It found that during the process of selling the AT1 bonds, individual investors were not informed about all the risks involved in the subscription of these bonds. 
• Super FD’ and ‘as safe as FD’:
  • The Sebi investigation also found that Yes Bank represented these bonds as a ‘Super FD’ and ‘as safe as FD’ to the investors.
• Reckless selling of the bonds:
  • SEBI also found that the push from the managing director of Yes Bank to down-sell the AT1 bonds led its private wealth management team to recklessly sell the bonds to individual investors.

More about the Bonds

• Meaning:
  • A bond is simply a loan taken out by a company. 
  • Instead of going to a bank, the company gets the money from investors who buy its bonds. 
  • Interest coupon:
    • In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value. 
  • Interest:
    • The company pays the interest at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan.
• Significance:
  • The bond market can help investors diversify beyond stocks.
  • Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability.
• Stock vs. Bonds:
  • Safer:
    • When bonds and stocks are compared, bonds are considered to be a safer investment. 
      • It is important to note that bonds are not completely risk-free and only receive preference in case of bankruptcy.
  • Less volatility:
    • Owning a stock offers more potential for returns, but bonds come with much less downside volatility. 
    • Bond investments play a key role in balancing and reducing the short-term volatility associated with stocks.
  • Larger market:
    • The bond market is actually much larger than the stock market, in terms of aggregate market value.
• Risks:
  • Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk.
• Bond Ratings:
  • Most bonds come with a rating that outlines their quality of credit. 
  • That is, how strong the bond is and its ability to pay its principal and interest. Ratings are published and are used by investors and professionals to judge their worthiness.
  • Rating agencies:
    • The most commonly cited bond rating agencies are Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings. 
    • They rate a company’s ability to repay its obligations. 
  • Ratings range:
    • Ratings range from AAA to Aaa for high-grade issues very likely to be repaid to D for issues that are currently in default.
• Types of Bonds:
  • Central Government Bonds:
    • As they are issued by the government, central government bonds carry the sovereign guarantee. 
    • This makes them one of the safest types of bonds. However, these bonds are exposed to inflation rate risk due to the long maturity period. 
  • State Government Bonds:
    • State Government bonds are also known as state development loans (SDLs). 
    • They are issued by state governments to fund infrastructural developments in the state or during liquidity crunch etc.
  • Public Sector Bonds:
    • These bonds are mostly issued by top public sector companies or institutions to fund their growth and expansion needs. 
    • They are relatively less risky than corporate bonds.
  • Corporate Bonds:
    • Corporate bonds are issued by private companies. They represent a large portion of the bond market in India. 
    • By issuing corporate bonds, companies can raise capital at a low cost.

Source: TH