Scepticism over AT-1 bonds may hit smaller PSU banks

Mumbai: Most state-run banks seem to have a perpetual problem — of raising adequate funds. Already relative stragglers to private-sector lenders, smaller public-sector banks run the risk of ceding ground even further as their preferred capital-raising route — Additional tier 1 (AT-1) bonds — appears mined with scepticism. Very few primary deals have been done after the market regulator ordered new valuation methods for such instruments.

Fresh sales have also dried up after a bailout of Yes Bank blanked out the stressed lender’s outstanding AT-1 bonds, raising the risk perception of this route. In fact, the AT-1 sale tally for FY22 is empty — at least until now.

By contrast, during the same period last year, borrowers sold ₹1,745 crore of AT-1 papers, show data from JM Financial. In FY21, local perpetual bonds worth ₹34,322 crore changed hands in the secondary market between April and August. This has less than halved this financial year to ₹15,806 crore for now. “The domestic market has completely dried up for perpetual issuances,” said Ajay Manglunia, managing director - debt capital market at J M Financial. “Traditional investors are not willing to buy those papers citing complication over valuation methods. Every investment risk has to be managed by the regulator and investors if we are to develop our bond markets.”

Mutual funds, once major AT-1 buyers, almost stopped subscribing those papers in the local market, prompting top-draw lenders to tap offshore investors. HDFC Bank, Axis Bank and have begun preparations to raise such quasi-equity securities overseas. HDFC Bank could well be the first one to hit offshore, ET reported about two weeks ago. AT-1, also known as perpetual bonds, add to banks’ capital base unlike perpetual papers issued by a corporate. Such securities do not have any fixed maturity but generally have a five-year call option that allows an exit route for investors.

“Revised regulation on AT-1 bonds is a key reason for not investing in perpetual bonds,” said Rajeev Radhkrishnan, CIO- debt, SBI AMC. “The new valuation method brings in a lot of potential volatility and illiquidity. Hence, from a portfolio perspective, we have incrementally avoided these exposures.”