Perpetual bond market comes back to life

Mumbai: The market for perpetual bonds from banks is clawing back to life as yield-hungry investors begin to take higher risk and banks open up for such sales after yields come back to affordable levels.Some top private banks such as HDFC Bank and state-run banks such as Bank of Baroda may be among those who sell these bonds now, said bankers. While investors may be willing to buy, that may come at a premium as these bonds known as Additional Tier-1 or AT1 bonds have lost their next-to-sovereign safety tag.This calendar year so far, there were only two issuers who raised Rs 1,300 crore through the route. In contrast, Rs 3,427 crore was raised during the same period last year, data compiled by JM Financial show. Banks have not managed to raise any money through AT1 after the developments surrounding Yes Bank.76970786“Investors have recognised the risk factor after a private sector bank did not repay perpetual bondholders,” said Ajay Manglunia, head-fixed income at JM Financial. “Large branded banks could revive the investor sentiment although they may have to pay a few basis points higher.”On January 22, South Indian Bank raised Rs 500 crore offering 13.75 per cent, which was the last perpetual bond sale by any bank. Tata International was the other issuer.The Reserve Bank of India had allowed Yes Bank to write-down its AT1 exposure of Rs 8,415 crore, under Basel-III norms that allow extinguishing of these instruments if the bank faces a bankruptcy-like situation. Investors have contested that decision in court.Perpetual bonds are a quasi-equity instrument where there is no fixed maturity. They usually have a “call option” where after a few years the sellers buy back from the investors. These are perceived to be less risky till the Yes Bank episode as there were no losses till then and returns were high.They carried a high coupon because they were also known as contingent convertible bonds, which had a clause that if a bank’s capital falls below a certain threshold these would get converted into equity.

from Economic Times https://ift.tt/2DJYxLR