Most bonds pay interest for a fixed period and return your money on maturity. Additional Tier 1 bonds work differently. Banks issue them to strengthen their capital and meet RBI rules.
You earn interest as long as the bank stays financially healthy. But there’s no fixed maturity, and the bank repays the amount only if it decides to redeem the bond.
Still need clarity on what are Additional Tier 1 bonds? Read this comprehensive guide to understand how AT1 bonds work, their features, the risks involved, and investor suitability.
What Are Additional Tier 1 Bonds?
Additional Tier 1 bonds are perpetual debt instruments that banks issue to strengthen their core capital under the RBI’s Basel III norms. They carry higher risk than traditional bonds as they are meant to absorb losses during financial stress.
Unlike regular bonds, they do not have a fixed maturity date and can continue indefinitely unless the bank decides to redeem them after a few years.
AT1 bonds are part of a bank’s Tier 1 capital, which includes:
- Common Equity Tier 1 (CET 1): Equity shares and retained earnings that form the strongest capital base.
- Additional Tier 1 (AT1): Instruments like AT1 or CoCo bonds that can be converted into equity or written off if capital levels fall below regulatory limits.
How Do AT1 Bonds Work?
When you invest in Additional Tier 1 (AT1) bonds, you lend money to a bank so it can meet its capital adequacy requirements under Basel III norms. In return, you receive regular interest payments, known as coupons, as long as the bank remains financially stable.
Banks can choose to redeem AT1 bonds after five or ten years, but they are not obligated to do so. If a bank’s capital ratio drops below the required level, these bonds can be converted into shares or written off. In 2020, for example, Yes Bank’s AT1 bonds were fully written off by the RBI.
Key Features of AT1 Bonds
If you are exploring Additional Tier 1 bonds, here are the main features you should know:
- Perpetual in nature: These bonds do not have a fixed maturity date. You keep receiving interest until the bank decides to redeem them.
- Callable by the bank: The issuer can redeem these bonds after a specific period, usually five or ten years, but it is not required to do so.
- Higher coupon rates: AT1 bonds usually offer higher interest than regular bonds because they carry more risk.
- Loss absorption: If a bank’s financial health weakens, these bonds can be converted into shares or written off to protect its capital base.
- Discretionary interest payments: The bank can skip interest payments if profits or reserves are low. Missed payments are not repaid later.
- High minimum investment: Each bond requires a minimum investment of ₹1 crore, which limits participation to institutional and high-net-worth investors.
- RBI regulated: All AT1 bond issues in India follow RBI’s Basel III guidelines, which define how banks maintain capital adequacy and manage risk.
Exploring the Risks of AT1 Bonds
If you’re thinking about investing in Additional Tier 1 bonds, it’s important to understand the possible risks before you decide:
Write-Off or Conversion Risk
If the issuing bank’s financial position weakens, the AT1 bonds can be written-off or converted into shares. In this case, you may lose some or all of your investment.
Interest Payment Risk
Issuing banks can suspend interest payments on their Additional Tier 1 bonds if they don’t have enough profit. The missed payments are not repaid later.
No Guarantee of Principle Repayment
In AT1 bonds, there is no guarantee that you will get back the principle invested because there is no maturity date. This means that if the issuing bank fails, you may lose your principle.
Market Liquidity Risk
Selling AT1 bonds on the secondary market can be challenging. These bonds are not frequently traded and it can be difficult to find a buyer causing liquidity issues when you need access to funds.
Subordination Risk
If a bank is liquidated, AT1 bondholders are among the last to be paid. You’ll only be ahead of shareholders in the repayment order.
Who Can Invest in AT1 Bonds?
Given the complex nature and higher risks associated with Additional Tier 1 bonds, general retail investors typically do not invest in them. These bonds are primarily suited for:
- High net-worth individuals (HNIs)
- Institutional investors
The minimum investment amount is also set at a premium limit of 1 crore. This may invariably make AT1 bonds accessible to investors who have access to such a sizable investment pool.
AT1 Bonds vs Regular Bonds: A Comparative Analysis
Let’s have a look at the main differences between AT1 bonds and other bonds:
| Feature | AT1 Bonds | Regular Bonds |
|---|---|---|
| Issuer | Banks and NBFCs for capital adequacy. | Companies, governments, or banks. |
| Maturity | Perpetual, no fixed maturity date. | Fixed term, usually 5–10 years. |
| Principal Repayment | Not guaranteed; depends on bank redemption. | Repaid at maturity. |
| Interest Rate | Higher due to greater risk. | Lower and more stable. |
| Coupon Payment | Payments are discretionary and may be skipped. | Mandatory and regular. |
| Loss Absorption | Can be written off or converted to equity. | Principal stays intact. |
| Liquidity | Limited secondary market trading. | Generally more liquid. |
| Investor Suitability | For HNIs and institutional investors. | Suitable for different investor types. |
The Bottom Line on AT1 Bonds
Additional Tier 1 bonds support banks in maintaining financial stability during stress by absorbing potential losses. For investors, they can offer higher coupon income compared to traditional debt products but also come with significant risks, including loss of capital.
If you want to invest in debt and fixed-income instruments but without such a high risk exposure, you can explore corporate bonds and FD options on the GoldenPi platform.
FAQs on AT1 Bonds
What is the full form of AT1 bonds?
The full form of AT1 bonds is Additional Tier 1 bonds. These are perpetual debt instruments issued by banks to strengthen their Tier 1 capital under the Basel III framework.
Are AT1 bonds safe?
AT1 bonds carry higher risk than regular bonds. They can be written off or converted into equity if the issuing bank faces financial stress. They may be considered by HNIs who understand these risks and have a high risk appetite to handle them.
Who regulates AT1 bonds?
In India, Additional Tier 1 bonds are regulated by the Reserve Bank of India (RBI) under the Basel III capital adequacy norms. SEBI also oversees investment-related disclosures and mutual fund participation.
Do AT1 bonds pay higher interest?
Yes, AT1 bonds generally offer higher coupon rates compared to traditional bonds to compensate for the greater risk involved.
Can AT1 bonds be converted into equity?
Yes, AT1 bonds can be converted into equity or written off if the bank’s capital falls below the regulatory threshold. This helps the bank absorb losses and maintain stability under stress.
What is the maturity period of an AT1 bond?
AT1 bonds have no fixed maturity period. They are perpetual in nature, meaning you receive interest as long as the bank remains financially sound, but the principal is repaid only if the bank redeems them.
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
