Power Finance Corporation (PFC) is believed to have invested Rs 800 crore in Andhra Bank’s additional tier-I (AT-1) bonds, a senior executive at the bank confirmed with FE. The bonds carry a coupon rate of 10.95%. Earlier, the financial institution had invested Rs 1,000 crore in Dena Bank’s additional AT-I bonds or perpetual bonds.
Such bonds don’t have a fixed maturity date and are considered equivalent to equity. Given its perpetual nature, investors often demand a higher yield.
A senior Andhra Bank executive told FE the bank had approached cash-rich PSUs for the AT-1 bond issue and PFC decided to invest. “Given the current market conditions, we believe the coupon rate of 10.95% is good pricing,” the executive said. He added the fresh capital would raise the bank’s capital adequacy ratio by 60 basis points. As on December 31, 2015, the bank’s CRAR stood at 10.92%.
An email sent to PFC’s director (finance) R Nagarajan remained unanswered at the time of going to press.
Andhra Bank said in a BSE filing the private placement issue of unsecured non-convertible Basel-III compliant 10.95% AT-1 bonds opened on February 17 and closed on February 19.
“The bank has received the entire issue amount of R800 crore and the allotted bonds will be credited to the investor demat account through necessary corporate action within two working days from the date of allotment,” the notice added. Dena Bank’s AT-I issue for R1,000 crore, according to sources in the bond market, was also priced at 10.95%.
Banks were earlier hesitant to issue AT-1 bonds because of the demand from investors for high yields.
“Investors had earlier demanded yields of as much as 13% for AT-1 bonds because of which banks were shying away from the market,” a bond arranger said.
One factor that has affected the issuance of such instruments is the investment limitations faced by the Employees’ Provident Fund Organisation (EPFO), a big investor in the debt market. According to the notification issued last year, investments in tier-I bonds should not exceed 2% of the total portfolio of the fund.
Moreover, the bonds should also have a minimum rating of AA or an equivalent rating. Even Life Insurance Corporation (LIC) cannot invest in AT-I bonds, according to market experts. In the absence of LIC and EPFO, other players have gained bargaining power and driven up yields.
According to bankers, some other public sector banks are also discussing the possibility of AT-1 bond issuances to some cash-rich PSUs.
Bankers are now hoping that the Union Budget for 2016-17 would contain provisions that will make more players eligible to invest in AT-I bonds and the instrument more attractive.
* AT-1 bonds do not have a fixed maturity date
* Given perpetual nature, investors seek higher yield
* Funds raised via AT-1 bonds help shore up tier-1 capital
* PFC said to have invested R1,000 crore in Dena Bank’s AT-1 bonds
* IDBI Bank plans to issue AT-1 bonds in offshore markets