Additional tier-I bonds or perpetual bonds of some of the major banks are witnessing increased liquidity in the secondary markets along with a fall in spreads, according to bond arrangers and market experts.
Additional tier-I bonds or perpetual bonds of some of the major banks are witnessing increased liquidity in the secondary markets along with a fall in spreads, according to bond arrangers and market experts. Perpetual bonds do not have a fixed maturity period. For the same reason, yields on these instruments tend to be a bit higher than that of a conventional non-convertible debenture. These bonds qualify as tier-I capital and boost the capital adequacy ratio of banks. A bond trader pointed out that AT-I bonds of some major banks have seen increased demand in the secondary markets. “Some of these popular names are seeing a surge in demand in the secondary market. For example, Axis bank’s 8.75% perpetual bond is currently trading at 8.73% while HDFC Bank’s 8.85% perpetual bond is trending at 8.42%,” the bond trader said.
It is noteworthy that demand is limited to ‘AA’ and above-rated papers as some of the major debt market players cannot invest in lower-rated papers. “Yields range from approximately 8.25% on the lower end to nearly 13% on the higher side. Yields vary due to the perceived strength of the balance sheet of such banks, ratings, liquidity available on such bonds. etc,” said Lakshmi Iyer, chief investment officer and head of products at Kotak MF.
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Spreads with the benchmark also fell since the Reserve Bank of India relaxed the norms for coupon servicing of such bonds. “As a result, major market players like insurers, mutual funds, etc became comfortable in investing in these bonds,” observes Ajay Manglunia, EVP and head – fixed income markets at Edelweiss Securities.