I think you are referring to the recent downgrade of Yes Bank Debt across various categories by CARE Ratings. The downgrade has been by one notch and includes Infrastructure Bonds, Lower Tier II Bonds, Tier II Bonds, Additional Tier 1 Bonds, Upper Tier II Bonds and Perpetual Bonds. One of the main reasons cited was delay in raising core equity capital. At the same time, the asset quality of the bank has also been consistently weakening. As of November end, Mutual Funds overall have an exposure of Rs.2,932 crore to Yes Bank with a large exposure to the highly risky Additional Tier 1 bonds which were downgraded by CARE from BBB+ to BBB. This is significant because any downgrade below BBB would force mutual funds to start writing down their holdings.

The big risk is on the AT1 Bonds which are risk participation bonds. In this case, Yes Bank can skip coupon payments if its Tier I Capital Ratio (CET 1 Ratio) falls below 5.5%. The bank can also convert such bonds into equity. As a percentage of assets, Baroda Treasury Advantage has exposure of 23.49% of AUM to Yes Bank bonds, followed by Nippon India Strategic Debt Fund (17.43%) and IDBI Credit Risk Fund (12.22%). However, in absolute terms, Nippon has the highest exposure of over Rs.1650 crores across different funds. The fund may choose to take a write-off or just side-pocket the loss making portfolio. Either ways this is a big loss and could negatively impact the stock price of RNAM. More so, considering that the stock is already under pressure due to rich valuations. Traders and investors need to position accordingly to play out this trend.