What are Additional Tier-1 (AT-1) bonds?

Why in News?

On October 15, the Supreme Court upheld the Bombay High Court’s decision to quash Yes Bank’s write-off of Additional Tier-1 (AT-1) bonds worth ₹8,415 crore during the bank’s restructuring in 2020. The ruling concerns the treatment of AT-1 bondholders during a bank’s financial distress.

What Are AT-1 Bonds?

Additional Tier-1 (AT-1) bonds are debt instruments issued by banks to strengthen their Tier-1 capital and meet regulatory capital requirements. They are designed to absorb losses when a bank faces financial stress.

Key features include:

• Perpetual nature: AT-1 bonds generally have no fixed maturity date. Investors do not have a guaranteed date for repayment of their principal.
• Interest payments: They may provide periodic interest or coupon payments, but these are subject to the bond’s terms and applicable regulatory conditions.
• Loss absorption: Under specified conditions, they can be written down or converted into equity to help absorb a bank’s losses.
• Higher risk: They generally carry greater risk than conventional bonds and may offer higher coupon rates in compensation.
• Regulatory purpose: They help banks maintain adequate capital buffers and strengthen their capacity to absorb losses.

Difference Between CET-1 and AT-1 Capital

Feature	Common Equity Tier-1 (CET-1)	Additional Tier-1 (AT-1)
Nature	Ordinary equity capital, including common shares and retained earnings	Perpetual debt instruments and certain other eligible capital instruments
Capital quality	Highest-quality regulatory capital	Additional loss-absorbing capital
Returns	Shareholders may receive dividends	Investors may receive coupon payments, subject to conditions
Loss absorption	Absorbs losses through reductions in equity value	May absorb losses through write-down or conversion into equity under applicable terms

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