Icra downgrades Yes Bank's tier-II bonds to 'D' after RBI clampdown

Agency said downgrade has factored in specific features of the instrument where debt servicing is linked to meeting regulatory norms on capitalisation, i.e., CAR of 9%

Rating agency Icra has downgraded private sector Lender Yes Bank’s upper tier-II bonds from “BB” to “D” after Reserve Bank of India declined bank’s request to allow it pay coupon on this instrument.

RBI had restrained payment of interest (coupon) on the tier-II bonds as private lender’s capital adequacy ratio (CAR) was below regulatory requirements. Its CAR was of 8.50 per cent as on March 31, 2020.

Yes Bank had approached banking sector regulator with plea to allow payment of interest due as on June 29, 2020 for Upper Tier II Bonds. These unsecured non-convertible upper tier-II bonds carry coupon of 10.25 per cent.

The rating agency said the downgrade has factored in the specific features of the instrument where the debt servicing is linked to meeting the regulatory norms on capitalisation i.e. CAR of 9 per cent.

In case the bank reports a loss, the coupon or redemption can be paid with the prior approval of the RBI, provided that on such payment, the CRAR remains above 9 per cent.

While the bank has adequate liquidity for coupon payment, the coupon is not payable if the CRAR is below the regulatory requirement.

Since the bank is in advanced stages of capital raising (Rs 15,000 crore), it sought RBI’s permission for the coupon payment, which was not approved.

As a result, the timely servicing of the upcoming coupon, which is cumulative in nature remains constrained and the same is likely to be paid only when the bank achieves a CRAR of 9 per cent.

Further, the ratings factors in the reported net loss of Rs 16,418 crore in FY2020 and the write-down of the Additional Tier I (AT-I) bonds in Q4 FY2020.

To restore the capital position, the board and shareholders have approved an equity capital raise of Rs. 15,000 crore. The proposed capital raise is in line with ICRA’s earlier estimates of Rs. 9,000-13,000 crore to maintain the capital ratios above the regulatory levels (including capital conservation buffer (CCB) of 2.5 per cent). However, this is unlikely to be concluded before the upcoming coupon due date on the Upper Tier II bonds.