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AT1 Bond Sale: HDFC Bank ropes in I-Banks

AT1 Bond Sale: HDFC Bank ropes in I-Banks

28 Jul 2021

Mumbai: HDFC Bank has hired about nine investment banks to raise up to $1 billion through its first ever additional tier 1 (AT1) bonds in the overseas market after the Securities and Exchange Board of India’s (Sebi) rule on valuations dried up investor interest in the domestic market.

These banks are Barclays, Bank of America, Citi, HSBC, JP Morgan, Standard Chartered, MUFG, Sofgen and BNP Paribas, said three people in the know. The issue may be launched as early as next week.

“The bank held a group call Tuesday with all such investment bankers announcing their appointment,” one of the persons cited above told ET. It is likely to raise anything between $500 million and $1 billion depending on demand and pricing.

Issue may be More Expensive

Close negotiations are currently going on. HDFC Bank did not reply to ET’s query. Individual banks could not be contacted immediately for comments.

The issue may turn out to be more expensive than in the past vanilla overseas bond sales as instruments are billed quasi-equity, a riskier bet.

The proposed bond sales are estimated to offer between 4% and 5% yield although initial price guidance is not yet arrived at. Covering the whole currency risk, the total cost may go up to 9% although borrowers with offshore operations do not hedge fully, dealers said.

AT1, also known as perpetual bonds, add to banks’ capital base unlike perpetual papers, issued by any corporate. Such securities do not have any fixed maturity but generally have a five-year call option that allows an exit route for investors.

Those papers are always rated one or two notches lower than the issuer’s general corporate rating.

“Raising capital offshore is not a problem for the bank, which is over-owned by overseas investors in the local equity market,” said Sanjiv Bhasin, director at

. “The bank may have to pay a relatively higher cost for the proposed AT1 bond sale.”

“But, those papers will help diversify its capital raising sources with investors likely lining up for those issues,” he said.

(SBI) is supposed to be the only bank from India raising AT1 bonds overseas in 2016.

At least five large banks including Axis, HDFC and SBI are planning to raise up to $2 billion in the next few months by selling perpetual papers overseas, ET reported on July 7. Lenders aim to gear up their capital base sensing future loan demand with falling infection caseloads and expanding vaccinations.

Valuation rules

Earlier on March 10, the Sebi ordered mutual funds to cap ownership of bonds with special features at 10% of the assets of a scheme and value them as 100-year instruments from next month, potentially triggering a redemption wave.

Later, the capital markets regulator eased valuation rules but with some riders after the finance ministry asked Sebi to withdraw its directive to mutual funds.

The appetite for AT1 bonds has significantly dried up on the domestic turf as fund houses now appear hesitant to subscribe to those papers sold by banks in the local market.

Mutual funds are now often seen citing hurdles in valuing those papers as mandated by the regulator.

Between FY18 and FY21, perpetual bonds sales by banks have nearly halved to Rs 18,772 crore from Rs 34,860 crore three years ago, show data compiled by JM Financial.