AT-I bonds or perpetual bonds do not have a fixed maturity date and are considered to be equivalent to equity
In a somewhat surprising move, Power Finance Corporation (PFC) is believed to have invested R1,000 crore in Dena Bank’s additional tier-I bonds (AT-I). According to sources in the bond market, the paper had been priced at 10.95%. AT-I bonds or perpetual bonds do not have a fixed maturity date and are considered to be equivalent to equity. As a result, investors often demand a higher yield on this category of bonds.
While Dena Bank is majority-owned by the government, it is somewhat surprising that PFC would want to invest in a bank that has a high exposure to state electricity boards’ distribution companies. The PFC management declined to comment on the development. PFC’s director (finance) R Nagarajan refused to comment on a call and an email sent to him remained unanswered till the time of going to press.
However, sources in Dena Bank confirmed the investment had taken place.
“PFC has invested Rs 1,000 crore in Dena Bank’s AT-I bonds. We understand the finance ministry may have asked some public sector units to invest in AT-I bonds of state-owned banks,” persons in the know at Dena Bank confirmed to FE. They added that the bank was relieved it had access to capital at a time when provisioning requirements were rising.
Bond market sources said that apart from PFC, Rural Electrification Corporation (REC) and some other PSUs may invest in the additional tier-I bonds issued by banks. “Other banks such as Andhra Bank, Syndicate Bank and Bank of Maharashtra have been looking to issue AT-I bonds recently,” a bond arranger said. However, with the yields demanded by investors hitting as high as 13-14%, banks are finding it difficult to issue these instruments, according to market participants.
One factor that has affected the issuance of such instruments is the investment limitations faced by 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.
Two bankers said they hope the Union Budget for 2016-17, to be presented later this month, would contain provisions that make more players eligible to invest in AT-I bonds and also make the bonds more attractive.