Yes Bank bondholders reach out to RBI, Sebi on write-down

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Yes Bank bondholders reach out to RBI, Sebi on write-down

Move will hurt financial markets and is against the principles of natural justice, say investors

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MUMBAI: The Yes Bank fiasco is keeping large bond investors, financial institutions as well State Bank of India (SBI), the hesitant saviour of the failed lender, on tenterhooks. On Sunday, institutional investors reached out to Reserve Bank of India (RBI) and other financial regulators to point out how the Yes Bank management misled bond holders and kept them in the dark about the bank’s declining financials.

According to them, the central bank’s plan to write down the value of Rs 8,415 crore Additional Tier-1 (AT1) bond — an action that has little or no precedence — would not only hurt the financial markets and capital raising plans of banks but completely go “against the principles of natural justice.”

In an email to RBI on Sunday, Axis Trust Services, the trustee for the protection of the AT1 bondholders, said, “Even today, the promoters and family (of Yes Bank) is owning 8% of the bank and will continue to enjoy 4% stake in the Reconstructed Bank, despite their mismanagement resulting into huge losses to other investors and stakeholders.” Capital market regulator Sebi and Insurance Regulatory & Development Authority were cc’d in Axis’ email to RBI.

At the time of issuances in 2016 and 2017, the AT1 bond ratings indicated high degree of safety with regard to the timely payment of financial obligations. But subsequently, the investors allege, the bank gave wrong guidance and suppressed information on its loan book stress. For instance, the guidance on ‘credit cost’ was doubled in just 3 te advances. However, the issuer Bank (i.e., Yes) had not assumed any such new exposures which could raise the credit risk. In such a scenario, it is safe to conclude that the higher credit risk has arisen owing to the underlying stress in the financial position of the Issuer Bank. The management of the Issuer Bank was fully aware of the same but they willfully misguided the stakeholders including the Debenture Holders and instilled false confidence in them by underplaying the stress,” said the email to the financial market regulators who were also reminded about the divergence in Yes bank’s reporting of months – from the last quarter of FY19 to the first quarter of FY20.

“Such an increase in credit cost emanates primarily from corporanon-performing assets.

Arguing that AT1 bonds should not be written down without reducing equity, investors suggest that RBI could at least consider these bonds on par with equity, if not senior. “Unfortunately, in the draft proposal (for Yes bank), they are being treated sub-ordinate to equity. This is against global best practices where equity is always treated sub-ordinate to AT-1 bonds… A full and permanent write down of these bonds is tenable only in case of a liquidation scenario. The current draft approaches Yes Bank here as a going concern,” said the email. Interestingly, the SBI Provident Fund holds Yes AT1 bonds along with Nippon MF, Templeton MF, UTI MF, Indiabulls, Max Fin, and HNIs. “So, while SBI will infuse fresh money in Yes, its employees’ PF may lose out Rs 97 crore due to the AT1write-down,” said a money manager.

The total outstanding AT-1 issuance by various banks is Rs 91,000 crore, of which private banks account for Rs 38,000 crore (as on February 23, 2020).

Worries for SBI and others

Even as AT1 bond holders tried to salvage their investments, the SBI top brass is learnt to have sounded out private equity houses and foreign funds such as Blackstone and Tilden, and met senior bankers like Deepak Parekh to rope in more equity investors in Yes Bank.

“SBI would invest Rs 2,450 crore and may chip in a maximum Rs 10,000 crore in Yes. But the bank will need at least Rs 20,000 crore. The longer it takes to bring in others, the more difficult it becomes to lift the moratorium on withdrawal and transfer of funds by depositors. Not sure whether any investor has committed. It may not be easy,” said a senior banker.

“May be the plan to write down AT-1 bonds is in hope that foreign funds and PE investors will consider investing in Yes, this was one of the conditions they had earlier insisted on,” said the person.

Meanwhile, the industry is trying to figure out the quantum of letters of credit which were issued by Yes Bank and discounted by other banks. Such banks which have discounted the bills may not be able to recover funds from Yes as and when the LCs mature. “Unlike money market borrowings, there is no central database on LCs and bank guarantees given by a bank. In cases where LCs have not been discounted, the businesses will suffer,” said another banker.

A lurking fear in the financial market is the possible collateral damage from a probe by the Enforcement Directorate. “There was always a buzz in the market that Yes Bank used to cut back-to-back deals with some of the institutions. A prolonged investigation on Yes Bank could cast a shadow on the market which is yet to recover from the shock received by NBFCs. I don’t think the market can withstand another round of domino in the NBFC space,” said an industry official.

Source- Economic Times.