AT1 Bonds, also known as Additional Tier 1 bonds, are non-secure bonds that do not have a maturity date that banks use to expand their equity base and to conform with Base III guidelines. They were created in the aftermath of the financial crisis in the world as part of the Basel agreement. AT1 bonds are perpetual debt instruments having no expiration date.
AT1 Bonds are primarily utilised to raise capital over the long term. They are an excellent investment but with a higher risk. If there is an emergency in the future, the RBI may direct the struggling bank to cancel the bond without consulting investors.
AT1 bonds can be described as a loan instrument that allows for a substantial investment.The primary holder of this bond is mutual funds. Find out how to use these bonds.
- AT1 bonds don’t have a date of maturity.
- These bonds can yield huge returns.
- These bonds are accompanied by higher risk.
Principal At1 Bonds’ Key Features
- The name of perpetual bonds refers to at1 bonds. They don’t have an expiration date, but they do have the option to call.
- Banks issue Tier 1 bonds to cover their capital requirements in line with Basel III norms.
- AT1 Bonds earn more interest in comparison to other bonds.
- Banks issue these bonds via electronic platforms.
- The lender issuing the AT1 bonds can call the bonds back or repay the principal in a certain period.
- A minimum allocation and trading lot size must be at least Rs. 1 Crore.
- The investors cannot return AT1 bonds to receive cash since the holders do not have a put option.
- AT1 bondholders can sell the bonds on the secondary market when they need money. They are tradeable and can be traded for exchange.
How do these bonds differ from other credit instruments?
They are permanent. They don’t have a maturity date. They are more lucrative for investors but compared to other debt products that are vanilla and instruments, they are also prone to greater risk. When the ratio of capitalisation for the issuer drops lower than a certain percentage, and in case of institution failure, the rules permit the issuer to cease paying interest or even cancel the bonds, as was done during the Yes Bank case. The bonds are subordinated to other debts and are senior only to equity.
