YES Bank fallout: Mutual funds cut exposure to AT-1 bonds

Suresh P Iyengar Mumbai | Updated on March 25, 2020 Published on March 25, 2020

MFs’ investments in AT-1 bonds of public sector banks fell 6% to ₹21,330 crore in February

The mutual funds have cut down their exposure to additional Tier I (AT-1) bonds of banks by four per cent in February to ₹36,169 crore against ₹37,634 crore, due to YES Bank crisis and subsequent AT-1 bond write-off issued by the troubled bank reverberated across markets.

Surprisingly, MFs exposure to AT-1 bonds of public sector banks fell sharply compared to that of private sector banks. MFs have cut their investment in public sector AT-1 bonds by six per cent in February to ₹21,330 crore against ₹22,641 crore logged in January while that of private sector banks was down one per cent to ₹14,839 crore (₹14,994 crore).

Mutual funds have turned wary of investments in AT-1 bonds after the RBI wrote down their investment of over ₹3,000 crore in YES Bank as part of revival plan for the lender.

In fact, the RBI had written down the entire AT-1 bonds of the bank worth over ₹8,000 crore, shaking the investors confidence in these instrument. Some of the investors, including Nippon India Mutual Fund which had an investment of ₹1,800 crore in YES Bank’s AT-1 bonds, have already moved the Bombay High Court and a hearing is expected soon.

A Balasubramanian, Managing Director & CEO of Aditya Birla Sun Life AMC, said the fund house has remained underweight on AT-1 bonds due to its hybrid nature and have kept only limited exposure.

“Our investments are in issuances of select few banks on the basis of our risk-return analysis,” he said.

Incidentally, Adiya Birla Sun Life AMC did not have any investments in YES Bank AT-1 bonds.

The writedown of YES Bank’s AT-1 bonds is expected to result in risk aversion from investors and force banks to rethink their capital concerns.

According to recent ICRA’s estimates, there are outstanding AT-1 bonds worth ₹93,669 crore (it is ₹84,574 crore excluding YES Bank).

Of this, ₹39,315 crore is the share of private banks issuances (₹30,620 crore excluding YES Bank). Most of these bonds were issued during FY17 and FY18 with a first “call” option after the fifth year from the issuance date.

Published on March 25, 2020
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