Glut of perpetual bond issuances may push rates upwards of 10%

By: | Published: February 26, 2015 12:20 AM

Union Bank, which is likely to raise Rs 2,000 crore through perpetual bonds, may need to pay a coupon rate of above 10%.

Union Bank, which is likely to raise Rs 2,000 crore through perpetual bonds, may need to pay a coupon rate of above 10%. This is around 50-70 basis points higher than the coupon rates for perpetual bonds paid in January. Perpetual bonds do not have a fixed maturity date.

Till Wednesday, the bank received bids worth Rs 1,500 crore against Rs 2,000 crore it was seeking to raise, sources said.

Bond market experts attribute the rise in the rates for this category of bonds to the supply-demand mismatch. Since the beginning of this year, many banks had tapped the bond markets with perpetual bonds that have led to a subdued investor appetite for the same.

“It is a matter of demand-supply mismatch. Almost every bank has come out with perpetual bonds and such a high supply is putting pressure on yields,” said Ashish Jalan, assistant vice-president, fixed income at SPA Securities.

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Moreover, investors always tend to ask higher rates for perpetual bonds compared with fixed-tenure bonds due to the additional risk attached with it as perpetual bonds do not come with a fix maturity date.

A host of banks have been approaching the market since December 2014 to shore up tier-I capital. Bank of Maharashtra, Andhra Bank, and Bank of Baroda were some of the banks that had raised funds through this category of bonds.

In late January, perpetual bonds had seen a fall in

rates by around 30 bps compared with December 2014. Punjab National Bank had raised Rs 1,500 crore in January through perpetual bonds at a coupon rate of 9.15% while Oriental Bank of Commerce had issued perpetual bonds worth

Rs 500 crore at a coupon rate of 9.48%.

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