In 2020, with Yes Bank on the brink of collapse following bad loans and a run on, the State Bank of India led other bankers for a Rs 10,000 crore bailout. Three years later, history is repeating itself with Credit Suisse, which has been rescued by rival Swiss bank UBS, but it has more in common with Yes Bank.
While AT1 bonds worth more than a $1 billion were written off while saving Yes Bank, similar debt instruments of Credit Suisse worth $17 billion are now worth zero.
Bondholders irked
The value of Credit Suisse bonds was wiped off as part of a rescue deal brokered by Swiss regulator FINMA, although shareholders will get a payout.
This has angered bond owners in the same way as AT1 bondholders of Yes Bank who approached court against a write-off.
How were Yes Bank investors stung?
The Yes Bank investors had argued that the debt instruments, which turned worthless, were missold to them as high-quality assets.
Although the Bombay High Court had ruled in favour of Yes Bank bondholders to quash the write-off, the order was stayed by the Supreme Court.
In its appeal, Yes Bank contested that the decision on bonds was taken for restructuring, without which other lenders wouldn't have invested in it.
Volatile nature of AT1 bonds
AT1 bonds are used for raising funds at short notice for banks, and despite a higher risk factor, the debt instruments provide higher yields.
But these bonds issued to absorb blows from the market, don't guarantee interest payments and are swayed by the lender's financial health.
Despite the Yes Bank fiasco, Indian banks have continued to raise AT1 bonds, with a large number of those offered by public sector lenders.
Should investors be scared away?
Following the writeoff to save Credit Suisse, Goldman Sachs fears that it will cause long-term damage to demand for AT1 bonds.
UBS which has now taken over Credit Suisse, is also heavily dependednt on the same kind of debt instruments to raise funds.
