Bank of Baroda on Tuesday accepted bids worth Rs 1,650 crore for its perpetual bonds and closed the issue at a price of 8.70%, bond dealers aware of the matter told FE. The issue witnessed significant response from investors having received bids worth almost Rs 4,300 crore, dealers said.
Bank of Baroda’s (BoB) perpetual bonds are hitting the market after the country’s largest lender State Bank of India (SBI) issued perpetual bonds at 8.50%.
An additional tier-1 (AT-1) bond or perpetual bond is an instrument that does not have a fixed tenor but usually has a call option embedded. These instruments also have some risks associated with them. For instance, under certain circumstances where the bank is making losses, issuers may choose not to make coupon payments on these instruments. Moreover, with the instrument being perpetual in nature, investors demand a higher coupon compared to fixed tenor instruments.
“BoB’s issue was a combination of good quality paper with a reasonable yield. That is why you saw such a significant response from investors,” a dealer said.
Bond dealers indicated it is likely that more banks may consider hitting the market to raise funds via perpetual bonds after the response drawn by BoB.
“Banks are in need of capital and this may be a good time to hit the markets. With the response seen by BoB, it may be possible that some of these banks may begin to consider about the possibility of issuing perpetual bonds,” said an expert.