Owing to the decline in interest rates over the past couple of quarters and a subsequent fall in bond yields, additional tier-I bonds (AT 1 bonds) — also known as perpetual bonds — issued over the same period are now trading at a premium given their relatively high coupon.
“We have seen interest rates decline in the last few months and that is why you will find that the perpetuals issued in the last 3-6 months are now trading at a premium,” said Ajay Manglunia, head – fixed income at Edelweiss Securities. “The coupons on these bonds are relatively high, around 10.5%-11%, which makes them a very attractive buy for investors in this low interest rate regime.”
In the current calendar year, there have been 16 AT 1 bond issuances by Indian issuers, all of which were done by either banks or non-banking finance companies (NBFCs). Out of these, 9 issues carry coupons of 10.75% or more, one issue carries a coupon of 10.1%, while the others are priced sub-10%.
The issuers whose issues bear a coupon of less than 10% are State Bank of India (8.75%, 9%), Union Bank of India (9.5%), L&T Infra Finance (9.5%), and L&T Housing Finance (9.6%, 9.9%).
On the contrary, out of the 13 issues of AT 1 bonds in 2015 — all of them by banks or NBFCs — only 6 were priced at 10% or above, of which only 3 were priced above 10.5%.
“One has to bear in mind that these are very illiquid instruments, semi-liquid at best. Even State Bank of India, which is considered to be the most solvent of all the issuers because of it being a systemically important bank, is AA+ issuer, not AAA, which is why the coupons are relatively high,” said Lakshmi Iyer, chief investment officer – debt at Kotak Mahindra AMC.