Definition
AT1 Bonds (Additional Tier 1)
AT1 bonds are perpetual, loss-absorbing instruments that count as Additional Tier 1 capital for banks and can be written down or have coupons skipped under stress.
AT1 bonds have no maturity date and pay coupons only out of distributable profits, which the issuer can skip. Crucially, under Basel III rules they can be written off or converted to equity if the bank's capital falls below a trigger or the bank becomes non-viable.
The risks became vivid in India with the Yes Bank AT1 write-down in 2020, when bondholders lost their principal even as the bank was rescued. Because of this loss-absorbing feature, AT1 bonds offer higher yields than senior bank debt and are meant for informed investors.
Related terms
- Tier 1 CapitalTier 1 capital is a bank's core, going-concern capital, made up mainly of equity and reserves plus eligible additional Tier 1 instruments, that absorbs losses while the bank operates.
- Basel III NormsBasel III is the global bank regulation framework, adopted by the RBI, that strengthens capital quality, adds liquidity and leverage standards, and introduces capital buffers.
- Point of Non-Viability (PONV)The Point of Non-Viability is the trigger at which the RBI can require a bank's AT1 and certain Tier 2 instruments to be written down or converted to equity to keep it afloat.
- Subordinated DebtSubordinated debt is borrowing that ranks below senior creditors and depositors in repayment, often issued by banks and NBFCs to raise Tier 2 capital.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.