Investing in AT-1 Bonds

The Additional Tier 1 bond is categorized as a perpetual bond because it lacks a specific maturity date, which makes it more akin to equity than debt. These bonds are distinct because investors do not receive the principal amount back and the interest payments are theoretically perpetual. Despite being regarded as fixed-income securities, perpetual bonds are an unusual form of bond.

Has any one of you invested in them? Do share your experience.

After the Yes Bank AT1 bond fiasco, SEBI has restricted retail investors in investing in these bonds. Only institutional investors could subscribe to them, and introduced a minimum allotment size and trading lot size of ₹1 crore.

Another feature of the bond is the bank has the right not to pay interest on these bonds. It is their exclusive rights. They are mandated to pay only if Yes bank pays dividends. As long as Yes bank does not pay dividends, they are not supposed to pay interest on these Bonds. There is no obligation to pay accumulated interest over the years.

Came to know of this new thing when the bombay high court squashes yes bank AT1Bond write off and the chairman of yes bank mentioned this in an interview.

Few years back when I met a banker, they were offering these bonds, the size was 10 lack then and most of them on offer was PSU banks, I had shown interest but when the min size was 10 lack I backed off. No one, told me all these features of this bond.


An interesting thing i learnt today - The AT in AT-1 bonds stands for Additional Tier.

Apparently, these AT-1 bonds are low in seniority.
So, in case of any financial issues being faced by the issuer, the AT-1 bonds will be the last bonds to be honored.
(after discharging the liabilities of any Senior bonds and Subordinated bonds of the same issuer.)

[ Source ]

Also, am not quite sure whether AT-1 bonds are generally guaranteed/insured either. :thinking:
If not, then as you said,
they are bonds in just name
and possess all the qualities/risks associated with Equity/stocks. :sweat_smile:


Looks more riskier than stocks, as there will be a few buyers for many stocks, even if they pay pennies.

What would one do with these bonds, who would buy these? :face_with_spiral_eyes:

Only institutions are allowed to buy , so if you want to buy then only Mutual funds is the route!.

Usually Credit risk Debt funds holds AT-1(CoCos -Contingent Convertibles (CoCos): Definition and Use in Europe) .

So the problems are at institutional level, as with many things.

Don’t remember seeing such bonds in credit risk funds, it has been a while though.

Not really, its worst then that. Actually AT-1 bonds can be written of even before equities. As happened some time back in yes bank’s case.
Also, AT-1 provisions are such that if there are losses, bank can decide not to pay interest on these bonds
So AT-1 bonds are more riskier then equity but does not offer commensurate rewards.

While in theory it is correct, practically these bonds are sold with a call options of 5 to 10 years. So what banks use to sell it as 5 year bond (with implicit assumption that it will be paid back in 5 years). That’s how lot of retailers got lured to it, and some MF too.
Now thankfully rules have changed for MF so misspelling should have stopped.

My advice would be to stay away from AT-1 bonds.

In fact, lot of Banking & PSU debt funds also hold AT-1 bonds.
This is from ICICI banking & PSU fund

Right, i also seen SBI, ICICI , HdFc AT1 in some of the debt funds which i hold. Didn’t rem which funds might in other banking and psu or credit risk funds

For Yes Bank Investors it was a nightmare agree. Infact prior to Yes Bank’s I never knew there exists something called as AT-1 Bonds / Perpetual Bonds. However, how abut AT-1 bonds of PSU Banks - Like SBIN.

I came across this AT-1 Bond of SBIN: 945SBIPER (INE062A08199) which has current ASK of 10,10,900. This will yield an effective rate of 9.34%. I understand bank holds the right to write AT-1 offs and also debar from interest payment, but its in the case when bank undergoes a severe distress. Do you guys think this can happen with India’s Largest PSU - SBI?

The bond callable date is: MARCH 22 2024 OR ANY ANNIVERSARY DATE THEREAFTER.

A very simple answer, - No.

if SBI goes down, then it is as good as government goes down. I am sure SBI is the main banker for the Government. There could be decision made which could bring down the bank, but we tax payers will bail the bank. When such is the situation, SBI will not default on the bond. These bonds are miniscule when compared to SBI size and what tax payers can pay up every year.

Who ever thought Russia would invade Ukrain - even if this happens in India, SBI will remain.

But you cannot buy the same as a retail investor as SEBI has put some restrictions on retail investing in AT1 Bonds.

Bonds with actual sovereign guarantee (GSECs) are currently yielding 7.3% - 8 %.

For an investment of INR 10lac,
the difference between…

  • annual returns from GSECs (7.3% - 8%)
  • annual returns from this PSU AT-1 bond (9.34%)

…turns out to be INR 15-20K.

Thinking of these reduced returns as an insurance
to guarantee that nothing happens to the 10lac principal invested,
15K each year to insure 10lac is a very reasonable cost, right? :thinking:

Why bother with all the risks associated with an AT-1 bond ?
If one already has a couple of crores invested in GSECs,
and can afford to risk occasionally losing dividend-returns or even the principal itself,
then can take a chance with 1-2 lots (10-20lacs worth) of such corporate PSU / NBFC AT-1 bonds, maybe? :thinking:

I don’t know the odds of this happening with SBI. :person_shrugging:
However, here’s what i know…

If i were to purchase 1 lot of this SBI AT-1 bond,

  • Winning scenario = i win 15K (increased dividend returns compared to GSECs)
  • Losing scenario = i lose 10Lac (principal lost)

i.e. it is like an exciting lottery ticket that costs 10L, with a prize-money of 10.15L.
(compared to putting the same 10L into some “boring” GSECs)

Calculating the EV (Expected Value) associated with this “lottery-ticket”,

EV = (Probability of Winning) x (Amount Won) – (Probability of Losing) x (Amount Lost )
EV = (( p ) * (15,000)) - ((1 - p) * (10,00,000))

where p is the probability of SBI NOT defaulting on these AT-1 bonds,
i.e. both paying out the annual dividends at 9.34% and not writing-off the principal amount.

The net result is…

EV = (10,15,000 * p)  - 10,00,000

In the above equation, the break-even bet (EV = 0) is at p = 98.5
i.e. a positive EV requires p > 98.5
i.e. a +EV bet requires the probability of SBI defaulting on these AT-1 bonds to be less than 1.5%.

So, today one would invest in these AT-1 bonds
and expect to be better off than investing in GSECs today,
if the chances of SBI facing financial distress to the extent that they write-off these AT-1 bonds,
are lower than 1.5%.

NOTE: A more accurate EV can be calculated by including the other outcomes in the above equation.
(eg. the possibility of not receiving dividend in a particular year, but the principal amount invested in the bond not being written-off either)

PS: Also, anyone interested in estimating the probability/odds of rare events,
do checkout Neglect of probability - Wikipedia,
and adjust accordingly to account for one of the common biases in estimating rare events / extreme probabilities.

PPS: If one is good at estimating odds of rare events (a huge IF),
and is comfortable risking huge sums to earn a tiny return (but repeatedly and consistently over time),
i hear that selling options is something that one will likely enjoy.

@neha1101 I guess Retailers cannot buy from Primary market, from the secondary market they can.

@cvs Yea that makes more sense, investing in G-Sec, pledging them and selling LEAPS (wide legs to absorb any black swan event). Probably the difference of 1.84% can be easily achieved.

SBI just raised 3000 Crs of AT-1, last month at 8.25%. I doubt there would actually be a seller at 9.34%

SBI is giving 6.50% for 10 year FD for customers and giving 8.25% for AT1 Bonds.

1.75% could be the premium being paid for all the negatives of AT1 Bond

Institutions will be making money while conservative depositors who believe in SBI will get peanuts as interest rate. Even HDFC is offering higher rates at 7% for 10year.

All they have to do is offer 8% and small finance bank will be out of business for sure. When they need the money, why cant they offer higher rates to depositors as well.

8.25% - no bank I know off is offering such rates, wonder why SBI had to offer such high rates when the risk of default is negligible.

The SBI AT-1 bonds traded recently at 9.34% yield
are probably a different series/tranch of SBI AT-1 bonds than the ones issued recently.

The AT-1 bonds recently traded at an effective yield of 9.34%,
appear to have been originally issued at 9.4% (in 2020?).

FWIW, looking at the history of the scrip on BSE,
there were 28 units of 945SBIPER (10L face-value each)
traded at the price of 10,10,900 on 29 MAR 2023.
(and another unit was traded at a similar price last week on 06 APR 2023.)

Yes original issue at 9.45% in March 2019.

Seems like since just a year is left in maturity, not much interest in this bond and not much liquidity. Trades happening at par randomly. If you put in a bid today, not sure when it will actually be executed.

New series is issued for 10 years and hence better pricing at around 8.25%.
This is only explanation I can think of.

@neha1101 Yea I doubt who will susbcribe for this? The G-Secs are giving 7.5% around. Who would risk the capital for 0.75% extra gain? Is there something in AT-1 we are missing out? @cvs

Generally insurers and MFs.

Hmm… agree but again feels like why would they? just for 0.75% they would risk their capital?