Yes Bank Debt Holders Move Bombay High Court Against AT1 Bond Write-Off
Bondholders with exposure to Yes Bank Ltd.’s additional tier-1 securities filed petitions in the Bombay High Court against the decision to write off their investments as part of the plan to rescue the struggling private lender, according to two people in the know.
Nippon India Mutual Fund and Axis Trustee have moved the court to seek relief against the decision taken by the banking regulator, the people said on the condition of anonymity. The high court will hear the petitions on Wednesday.
The Reserve Bank of India has released a draft resolution plan for Yes Bank after superseding its board, capping deposit withdrawals at Rs 50,000 and appointing an administrator. The banking regulator proposed to write off Rs 8,400 crore worth AT1 bonds on the lender’s balance sheet while retaining equity. The rescue involves State Bank of India taking over 49 percent stake, appointing a new board, and managing director and chief executive officer.
About 16 Indian banks have Rs 93,669 crore worth AT1 bonds outstanding, according to a report released by rating agency ICRA Ltd. on Monday. And the write-off of such instruments issued by Yes Bank has triggered a debate about the seniority of the AT-1 bondholders over equity investors. According to some fund managers, the decision to write off debt securities without writing off equity goes against the credit hierarchy accepted in the market.
But RBI’s Basel III guidelines released in September 2014 clearly say it has the powers to write down or repay AT1 bonds depending on the situation.
“It is, however, reiterated that the terms and conditions of all non-equity capital instruments (i.e. both Additional Tier 1 and Tier 2) issued by banks must have a provision that requires such instruments, at the option of the Reserve Bank of India, to either be permanently written off or converted into common shares upon the occurrence of the ‘Point of Non-Viability (PONV)’ trigger event,” the RBI had said in the guidelines.
The guidelines specify triggers that can be considered for writing off of AT-1 bonds. One of these conditions is: “The decision to make a public sector injection of capital, or equivalent support, without which the firm would have become non-viable, as determined by the relevant authority.”
The circular also specifies that AT-1 bonds can be written down even if common equity is not.“The Write-down of any Common Equity Tier 1 capital shall not be required before a write-down of any Additional Tier 1 capital instrument.”
The RBI’s draft rescue plan, however, didn’t mention if Yes Bank had reached a point of non-viability. In a note published on its website on Thursday, the regulator cited deteriorating financial position without any concrete fund raising plan in place as reason for the decision to seize control of the private lender.