SMBC was aware of Yes Bank's AT-1 bonds litigation risk ahead of deal: Sources

A negative outcome to the prolonged litigation over additional tier-1 (AT-1) bonds was factored in by Japan's second largest financial conglomerate Sumitomo Mitsui Banking Corporation (SMBC) at the time of its investment in Yes Bank. According to highly placed sources, while the final verdict on the AT-1 bonds issue might have disappointed SMBC, "it has not come as a surprise to them", adding that an unfavourable outcome in the AT-1 bonds case was fully baked into the valuations of Yes Bank. "Senior executives of SMBC were sensitized about this issue (AT-1 bonds litigation) in multiple meetings they had with investment bankers involved in the deal and with RBI officials they interacted with while firming up the investments in the bank," said a senior banker who didn't want to be named. "In the worst-case scenario, if SC's verdict should be implemented by the bank, it will not have any bearing on SMBC's willingness to remain invested in Yes Bank. They are very committed to their investment," he added. In March 2020, as part of Yes Bank's reconstruction plan, AT-1 bonds were fully written down. The move was seen to be necessary to rescue the bank from a possible bankruptcy. However last week, India's apex court upheld a Bombay High Court's 2023 ruling that the decision taken in March 2020 by the then administrator of Yes Bank to strike down these instruments and fully write down their value is incorrect. Hence, if the SC verdict has to be implemented, these instruments (bond liabilities) have to be reinstated in the financials of Yes Bank. The move could impact its balance sheet to the extent of Rs 8,415 crore. Consequently, it could result in the common equity tier-1 equity capital of Yes Bank reducing by 2.3 percent to around 11 percent as per the bank's pro forma Q2 FY27 financials. While at these levels the bank remains well-capitalised, it is widely anticipated that implementing the SC verdict may trigger the need for a capital raise. Emails sent to SMBC and Yes Bank seeking comment on the matter remained unanswered. AT-1 bonds are perpetual, unsecured debt instruments which assume the certain characteristic of equity. While they are often seen as high coupon bearing instruments, they can be written off or converted to equity if a bank is undergoing financial turmoil. Capital infusion "This (the prospect of an unfavourable ruling) is the key reason why SMBC has not infused any primary capital into the bank; the deal so far has only been a series of secondary transactions," said an investment banker on condition of anonymity. SMBC currently holds a 24.99 percent stake in Yes Bank and is the single largest shareholder in the bank. SMBC acquired 13 percent stake from State Bank of India, which initially held 49 percent shares post Yes Bank's reconstruction. Another 7 percent was picked up from other banks including Axis Bank and ICICI Bank who were also part of Yes Bank's 2020 reconstruction plan. Subsequently, SMBC acquired a 4.99 percent stake from PE major Carlyle to consolidate its holdings to 24.99 percent. "SMBC's decision on primary capital infusion in Yes Bank will depend on how the SC's order is implemented," said another banker, adding that uncertainties around the AT-1 issue till last week was the key reason why SMBC has not yet firmed up on how it would increase its stake in the bank.