Banks aim to raise up to $2 billion via perpetual bonds offshore

Banks aim to raise up to $2 billion via perpetual bonds offshore

MUMBAI: Five top lenders in the country, including , Axis Bank and , are seeking to collectively raise up to $2 billion overseas in the next few months through Additional Tier I (AT1) bonds, bolstering their capital bases ahead of an anticipated increase in credit demand.

Mutual funds, once major buyers of such AT1 bonds, are lukewarm about this quasi-equity asset class after the banking regulator last year ordered that these instruments be written off in Yes Bank’s state-sponsored bailout.

Axis Bank and HDFC Bank are likely to be among the first to start the bond sales, three industry executives involved with the fund-raising told ET. ICICI Bank and Bank of Baroda are also reportedly in discussions with investment bankers about raising capital through AT1 bonds.

Individual banks expected to float fresh AT1 bond sales did not respond to ET’s queries.

“The overseas market is far deeper than the Indian market for AT1 papers,” said Karthik Srinivasan, group head, financial sector, ICRA Ratings. “As banks foresee demand for credit likely coming back, it makes sense for them to tap that huge pool of money available offshore, given the lower appetite for such papers at home.”

These bonds are expected to offer yields between 4 per cent and 5 per cent. Covering currency risks, the total cost may go up to 9 per cent, although borrowers with offshore operations do not hedge fully, dealers said. A group of investment bankers including Citi, HSBC, MUFG and JPMorgan are said to be helping those borrowers.

AT1 bonds, also known as perpetual bonds, add to a bank’s capital base and allow a lender to meet fund adequacy thresholds set by regulators. Such securities do not have any fixed maturity but generally have a five-year call option, giving defined exit routes to investors.

These papers are always rated one or two notches below the same issuer’s general corporate rating.

State Bank of India, the country’s biggest mass lender, was the only bank from the country to raise AT1 bonds overseas in 2016. Five-year call options on that series of AT1 bonds could be exercised this year.

“Appetite for AT1 bonds has significantly ebbed in the local market,” said Ajay Manglunia, managing director and head of debt capital market, JM Financial. “Fund houses often cite hurdles in valuing those papers as mandated by the regulator.”

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

In FY22, AT1 bond sales have so far been negligible.

On March 10, the Securities and Exchange Board of India (Sebi) ordered mutual funds to cap ownership of bonds with special features at 10 per cent of the assets in a scheme and value them as 100-year instruments from April, 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.

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