came across AT1 bonds on a bond platform. yield is 11%, issuer is a large private sector bank. AT1 sounds like it should be safe since it is a bank. but googled it and some things said Credit Suisse wrote these down to zero. what exactly are AT1 bonds and is 11% worth the risk?
AT1 stands for Additional Tier 1. These are perpetual bonds issued by banks to meet their regulatory capital requirements under Basel III norms. They are perpetual, meaning they have no fixed maturity date. The bank can call them after 5 years but is not obliged to. They pay a fixed coupon but can skip coupon payments without it being a default if the bank’s capital ratios fall below a threshold. In a bank failure or bailout scenario, AT1 bonds can be written down to zero or converted to equity before depositors or senior bondholders face any loss. The Credit Suisse reference you found is exactly this in practice.
wait so a bond can skip paying interest and it’s not even a default? that’s crazy
Yes, that is the design. AT1 bonds are structured as capital-absorbing instruments. When a bank is stressed, regulators can instruct the bank to cancel coupon payments or write down the principal to zero to preserve capital. This happened at Yes Bank in India in 2020 when AT1 bonds were written down to zero as part of the RBI-supervised rescue. Retail investors lost their entire principal. The 11% yield is compensation for this possibility, not for ordinary credit risk.
so Yes Bank retail investors in AT1 bonds lost everything. and SEBI did nothing?
SEBI and RBI actually responded to the Yes Bank incident by restricting the sale of AT1 bonds to retail investors. As of the current SEBI guidelines, AT1 bonds can only be sold to individuals if the minimum investment is Rs 1 crore. Below that threshold, AT1 bonds should only be going to institutional investors. If you are seeing AT1 bonds on a retail platform at accessible minimums, verify carefully whether the offering is structured compliantly or whether it is a different instrument being described loosely.
for a retail investor the answer is straightforward. the 11% yield reflects real and material risks that are qualitatively different from corporate bond credit risk. perpetual tenure, coupon cancellation without default trigger, and principal write-down in stress scenarios are not standard bond risks. unless you specifically understand and accept those terms, AT1 bonds are not appropriate for retail fixed income portfolios regardless of how attractive the headline yield looks.
not for retail. full stop.