Fixed Income Analysis /

Yes Bank: Interesting test case for bond investors

  • A moratorium restricting withdrawals is in place at Yes Bank; SBI has approved the purchase of Yes Bank shares

  • Comments from India’s authorities suggest that senior liabilities are to be honoured

  • A draft scheme stated that AT1 instruments would be written down in full; this has been opposed by bondholders

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
12 March 2020
Published byTellimer Research

Yes Bank (YESIN) has been in the news. Following a series of events, the LSE suspended trading in the YESIN 3.75% 2023 bond on 6 March and Moody’s has downgraded its rating on this security to Caa3. Comments from India’s authorities suggest that senior liabilities are to be honoured, but a 30-day moratorium imposed on the bank has caused more than a little concern, even though the next coupon on the bond is not due until 6 August. Basel 3 Additional Tier 1 (AT1) instruments were to be written down permanently, and in full. However, reports suggest opposition from holders of these instruments may mean that AT1s are converted into equity instead (in part). This will likely prove to be another important test case for the potential implications of government-backed intervention on bondholders. Below, we highlight key takeaways from the bank’s most recent results and summarise recent events.

  • Yes Bank was founded in 2004 and is the fourth largest private sector bank in India. At end-September 2019, the lender reported total assets of almost US$49bn, deposits of just under US$30bn and advances of US$32bn (based on the end-September 2019 exchange rate). In the half year to end-September 2019, YESIN reported a loss of just under US$70mn (based on the March-September 2019 average exchange rate) partly due to a 'one-off tax adjustment'. This compared to net income of US$318mn in the half year to end-September 2018 (using the same exchange rate). 
  • There was a series of management changes at YESIN in 2018 and 2019, including a CEO change mandated by the Reserve Bank of India (RBI). Asset quality has worsened, and there are still concerns about some of the bank's exposures. The reported gross non-performing advances (NPA) ratio rose to 7.4% at end-September 2019 from 3.22% at end-March 2019. In this context, it is not surprising that YESIN has been seeking to raise capital for some time, even though the reported capital adequacy ratio was 16.3% at end-September 2019. However, the lender did not succeed in raising enough capital/attracting new investors. As just one example of this, in February, YESIN stated that it had received non-binding offers from four potential investors. Nothing appears to have materialised from the talks. 
  • On 5 March, a Bloomberg report stated that the Indian government had approved plans for a consortium led by the State Bank of India (SBI) to buy a stake in Yes Bank. This drove the price of the YESIN 3.75% 2023 bond up over 10ppts. Yes Bank Ltd stock closed at INR36.80, up from INR29.30 on the previous day. Equity and fixed income instruments rallied even though Yes Bank stated that it had ‘not received any such communication from the RBI or any other Government or Regulatory authorities or from the SBI.’ SBI later stated that its board had given ‘in-principle approval’ to ‘explore investment opportunity’ in Yes Bank. On 12 March, SBI stated that the purchase of 7.25 billion shares in Yes Bank, at INR10 per share, had been approved by its board.
  • Separately, YESIN has disclosed that it will no longer exercise the call option on a Basel 2 INR-denominated Tier 1 security. This security was callable on 5 March 2020, and on 30 January, YESIN had stated that the call option would be exercised (subject to RBI approval). The lender stated that it was seeking approval from the RBI to pay the coupon on this instrument.
  • The RBI imposed a 30-day moratorium on YESIN, which will run from 5 March to 3 April, restricting deposit withdrawals and payments to creditors. Subject to RBI approval, the moratorium may not cover certain unforeseen expenses (such as withdrawals to cover education and healthcare costs). It also doesn’t cover any repayments due to RBI, SBI or any other bank. YESIN may also continue to operate its account at the RBI. India’s central bank also appointed an administrator for Yes Bank, superseding its board. As would be expected, Yes Bank’s equity and fixed income instruments were quoted significantly lower the day after the RBI announcement.
  • Early on 6 March, the London Stock Exchange announced that trading on the International Securities Market (ISM) for the YESIN 3.75% 2023 bond had been ‘temporarily suspended.’ 
  • A draft reconstruction scheme was published by the RBI. SBI is to own 49% of Yes Bank and this stake will remain above 26% for three years. The draft reconstruction scheme also stated the following:
    1. All deposits and liabilities ‘will continue in the same manner and with the same terms and conditions, completely unaffected by the Scheme.’ This would appear to include senior liabilities, such as the YESIN 3.75% 2023 bond.
    2. However, Basel 3-compliant Additional Tier 1 capital were to be ‘written down permanently, in full.’ There are only INR-denominated Basel 3 AT1s listed on Bloomberg. These include the YESIN 9.5% Perp issued in December 2016 and the YESIN 9% Perp issued in October 2017.

The RBI requested that comments on the draft be sent by 9 March. Holders of AT1 instruments have filed a petition in the Bombay High Court. Reports suggest these securities may be converted into equity instead – INR85bn in AT1 instruments may be converted into INR17bn of equity. According to Reuters, the administrator at Yes Bank stated that a deal with bondholders is 'in process'.

  • India’s Finance Minister (FM) also made a statement regarding Yes Bank on 6 March. The FM stated that the RBI has been closely monitoring developments at Yes Bank since 2017, and the matter will be ‘speedily resolved.’ In line with the draft reconstruction scheme, India’s FM stated that liabilities and deposits at Yes bank would be honoured. 
  • Rana Kapoor, founder and former CEO of Yes Bank, has been arrested on money laundering charges. He is accused of receiving 'illegal kickbacks' from Dewan Housing Finance. He denies the charges.
  • Of the three international rating agencies, only Moody’s assigns ratings to Yes Bank. Moody’s has downgraded the bank’s senior debt to Caa3 from B2. The new, lower rating remains ‘under review with direction uncertain’. The downgrade reflects the 30-day moratorium, which Moody’s states ‘prevents Yes Bank from making a full and timely payment to its senior creditors.’ Interestingly, the senior rating on Yes Bank was Baa3 in November 2017. Fitch commented that the takeover of Yes Bank ‘highlights systemic risks.’ The rating agency previously downgraded the operating environment rating to ‘bb+’ from ‘bbb-.’