Yes Bank's AT-1 bondholders may get equity against bonds

Yes Bank may offer shares to investors of its Additional Tier 1 (AT-1) bonds as a part of a settlement, in case the Supreme Court upholds the Bombay High Court order that quashed a March 2020 decision to write off Rs 8,415 crore of the debt, said people aware of the development.

Speaking to the media on Saturday, chief executive Prashant Kumar said the bank would challenge the high court’s order issued on Friday. During arguments, the bank’s counsel informed the court that it was necessary to cancel the AT-1 bonds to prevent the bank from collapsing.

On Monday, shares of Yes Bank fell 8.3% to close at Rs 18.15 on the BSE, compared with a 0.5% gain in the benchmark Sensex.

In December 2016, the bank raised Rs 3,000 crore through AT-1 bonds, offering a coupon of 9.5%. In October the following year, it raised another Rs 5,415 crore, offering 9%.

Speaking to analysts on Saturday, Kumar said: “In the worst case scenario, the common equity Tier-1 capital of the bank would come down. However, the capital adequacy would be maintained as the AT-1 capital increases.”

This would happen if the bonds' write-off stood cancelled as ordered by the high court, said an analyst.

“There is another solution. Bondholders in the past had sought to be compensated with shares of Yes Bank instead of the AT-1 bonds, which will ensure that the bank's equity capital is not eroded,” the people said. Bank analysts said this could dilute the shareholding, which could put pressure on financial ratios.

AT-1 bonds are high-risk unsecured perpetual bonds that the issuing bank can write off at pre-specified triggers, such as liquidation.

Soon after the central bank imposed a moratorium on the bank’s payments on March 5, 2020, AT-1 bondholders had filed a writ petition saying that they were willing to take an 80% haircut and accept equity in exchange for bonds. “The shares of Yes Bank have risen since, and they may negotiate for a less haircut, but this is all subject to the Supreme Court order,” said the bank analyst cited above.

However, the Reserve Bank of India’s counsel informed the court that there was no provision for the bank to give shares against the bonds, and it could only be redeemed as per the contract between AT-1 bondholders and the bank.

Individuals, Nippon Mutual Fund, Franklin Templeton India, Barclays, and Kotak Mutual Fund and 63 Moons are some of the large holders of the bank’s AT-1 bonds, according to media reports.

On Saturday, Kumar also informed analysts that Yes Bank would not be required to pay any previous unpaid interest to the AT-1 bondholders. "There is no cumulative nature of coupon payment, and in a financial year when the bank is in losses, the bank cannot pay the coupon,” he said. “These are perpetual bonds, and it is not mandatory to exercise the call option,” he added.

The court observed that bondholders' claim was superior to that of equity investors and subordinate to the claims of depositors. The bank cancelled the AT-1 bonds without writing off the equity.

Secondly, bondholders have objected to the administrator's decision to cancel AT-1 bonds even as the final reconstruction scheme did not provide for it.

Sanjay Sinha, former managing director of Axis Trustee, the trustee for AT-1 bonds, said: “It brings into fore the sanctity of AT-1 bonds. The question is whether investors want to invest in this instrument after Yes Bank arbitrarily gave a junior status over equity.”