Experts say that since the bank is not undergoing a liquidation or facing an insolvency action, the question of waterfall structure does not arise.
The Reserve Bank of India (RBI) has full rights to write down Yes Bank’s additional tier-1 (AT-1) bonds as part of its draft reconstruction scheme for the troubled lender, experts said.
According to Shailesh Haribhakti, chairman of Shailesh Haribhakti Associates, if one were to look at the fineprint of the Yes Bank AT-1 bond document, there is a mention which enables a writedown. “In any case, under Section 45 of the Banking Regulation Act, the RBI has full rights for such a step and I don’t think those are in anyway curtailed because of the situation that may emerge in this particular case. In many ways, the RBI’s power under the Act are quite significant and quite clear. In a legal battle we will have to wait for the court’s judgment but as far as the documentation is concerned, there is a good case for the restructuring to happen on the lines that the RBI is proposing,” Haribhakti said.
AT-1 bonds are debt instruments that do not have a fixed maturity and, for the same reason, command a relatively higher coupon. These instruments usually come with a call option post a certain number of years that allow the issuer to call back these instruments. In case an investor wants to exit, they can either sell these bonds in a secondary market or consider taking their money back if the issuer exercises the call option.
On Friday, the RBI came out with a scheme of reconstruction for Yes Bank where it said that the instruments qualifying as AT-1 capital issued by Yes Bank under Basel III framework, shall stand written down permanently, in full, with effect from the appointed date. “This is in conformity with the extant regulations issued by Reserve Bank of India based on the Basel framework,” the RBI said. Post this, reports have emerged stating that bondholders are considering approaching the courts over the restructuring plan of Yes Bank.
According to a document by RBI titled ‘Guidelines on Implementation of Basel III Capital Regulations in India’, “If the relevant authorities decide to reconstitute a bank or amalgamate a bank with any other bank under the Section 45 of BR Act, 1949, such a bank will be deemed as non-viable or approaching non-viability and both the pre-specified trigger and the trigger at the point of non-viability for conversion/write-down of AT1 instruments will be activated.
Accordingly, the AT-1 instruments will be converted/written-off before amalgamation/reconstitution in accordance with these rules,” it stated.
Many market participants have also been arguing about the fact that in the waterfall structure, the AT-1 bonds are placed above the equity. An analyst report explains that the claims of the investors in AT-1 instruments would be superior to the claims of investors in equity shares. “This has created discrepancy with regards to their treatment vis-a-vis equity and market will be keenly watching clarification from RBI on the same,” the report said.
Experts say that since the bank is not undergoing a liquidation or facing an insolvency action, the question of waterfall structure does not arise. “The waterfall structure of different instruments comes into effect in case of a liquidation or an insolvency action. In Yes Bank’s case, we are looking at a reconstruction as ordered by the RBI. The waterfall structure does not come into the picture at all in this particular case,” Haribhakti explained.
A fixed income head at a fund house told FE that within the framework of AT-1 bonds, the instruments can be written down in the event of non-viability as they are meant to absorb losses. “The issue may be around the interpretation of the fact that the bank is non-viable because it is being revived rather than being liquidated. In this case, the bank is looking at a reasonably good equity infusion, and hence bondholders may be optimistic that the bank’s AT-1 bonds have some value,” the executive said.
According to ICRA’s estimates, a total of Rs 93,669 crore of AT-I bonds will be outstanding as on date (Rs 84,574 crore excluding Yes Bank), of which Rs 39,315 crore will be of private banks (Rs 30,620 crore excluding Yes Bank). Most of these bonds were issued during fiscal year 2017 (FY2017) and FY2018 with first call option after 5th year from issuance and hence large bonds are due for call in FY2022 and FY2023, ICRA said.