A Bond Marketed as Safer Than Equity Was Wiped Out First

The capital structure is taught as a fixed ordering: equity absorbs losses first, creditors after. Additional Tier 1 bonds are a regulator-designed exception to that ordering, and in March 2020 the exception was tested to completion.

What follows concerns the mechanism written into the instrument, not the conduct of any particular distribution.

Rs 8,415 Crore to Zero, While Equity Survived

On 14 March 2020, as part of Yes Bank’s reconstruction, its entire outstanding stock of AT1 bonds - ₹8,415 crore - was written down to zero.

Equity investors in the same bank were heavily diluted, but their shares retained value. The bondholders’ instrument was extinguished completely. A security sold and widely bought as fixed income, paying a coupon above a regular bond precisely because it carried more risk, finished worse off than the equity it was supposed to rank above.

This Is the Product Working as Designed

The outcome was not a loophole. AT1 bonds are built under Basel III with a loss-absorption trigger written into their terms: when a bank’s capital ratios breach a defined threshold, or a regulator determines the bank is not viable without support, the bonds can be written down or converted - ahead of, or independent of, what happens to equity.

That trigger is the reason the coupon is higher than senior debt. The extra yield is the compensation for exactly the event that occurred. Nothing was mispriced by the issuer; what was mismatched was the risk the instrument carried against the category buyers filed it under.

The Ordering Is Conditional, Not Fixed

The general lesson is broader than one bank. Seniority in the capital structure is a contractual property, and a contract can specify conditions under which the ordinary ordering inverts.

An instrument’s position in the stack is therefore not readable from its asset class label. “Bond” describes the cash flow shape. It does not, on its own, describe where the instrument sits when a resolution authority acts.

What This Means for Allocators

Read the trigger language, not the asset class. The threshold and the point-of-non-viability clause are where the seniority actually lives.

Treat yield above senior debt as a description of a specific event, and identify which one. A spread is compensation for something nameable.

And hold the mechanism separately from the case. The Yes Bank write-down was challenged in court and the litigation has run for years since - what is not contested is that an AT1 bond carries a switch that can subordinate it below equity, and 2020 is when it was thrown.