Mumbai: Public sector banks, especially those under the Reserve Bank of India’s (RBI’s) prompt corrective action (PCA), are likely to recall their risky additional tier-I (AT-1) bonds, a move that could possibly lead to investors taking a hit on their investments, said analysts and bond dealers.
AT-1 bonds worth Rs37,600 crore may be prematurely recalled by banks, including those under PCA and those likely to fall under that framework, rating agency Icra said in a note on Tuesday.
Bank of Maharashtra will recall Rs1,500 crore of tier-I bonds on 17 March ahead of their call dates in 2020 and 2021, according to a Bloomberg report dated 21 February. The lender is among the 11 state-run banks that are under PCA for higher bad loans and negative return of assets.
Bank of Maharashtra has recalled these bonds in compliance with all rules, said a senior official of the bank, on the condition of anonymity.
Issued under Basel-III capital norms, AT-1 bonds, also known as perpetual bonds, are sold by banks with an option to recall, usually at the end of fifth year.
These bonds can be called before the date of call option if there is “regulatory event” but provided the capital is replenished.
“As per stock exchange filings by two PSBs (Bank of Maharashtra and Oriental Bank of Commerce) and notice to bondholders of these banks, the RBI has confirmed to government that the inclusion of a bank under the PCA framework as a ‘regulatory event’,” Icra said in a note on Tuesday.
“This, coupled with confirmation by the RBI that capital infused under the recent recapitalization programme of the government can be utilised to replace the existing AT-1 bonds and subsequent instructions from the government to recall their AT-1 bonds, has triggered early calls by banks,” the rating agency added. Of the Rs88,000 crore recapitalization for this fiscal, 11 banks under PCA have been allotted Rs52,311 crore.
According to bond dealers, investors have bought AT-1 bonds at a premium taking into consideration sovereign support.
Banks have the prerogative to skip coupon payments for AT-1 bonds in case they don’t have enough profits or distributable reserves.
Additionally, banks also have the option of converting these bonds into equity in case the core capital falls below a pre-specified level. If the purchase is at a value higher than the face value of the bond, these investors will have to take a hit in case of early recall.
“One has to see the proportion of investors who bought it at discount, and those at premium. From the broader perspective, the regulatory message is clear that there will be no more dispensation and instead, the supply of these bonds is exhausted. This, from a long-term perspective is positive because as the supply is drained and overall market improves, it will lead to better rated issuance at an improved pricing,” said Lakshmi Iyer, chief investment officer (debt) and head (products) at Kotak Mahindra Asset Management Company Ltd.
Additionally, banks also have the option of converting these bonds into equity in case the core capital falls below a pre-specified level.
If the purchase is at a value higher than the face value of the bond, these investors will have to take a hit in case of early recall.
“One has to see the proportion of investors who bought it at discount, and those at a premium. But from the broader perspective, the regulatory message is clear that there will be no more dispensation and instead, the supply of these bonds is exhausted. This, from the long-term perspective, is positive because as the supply is drained and overall market improves, it will lead to better rated issuance at an improved pricing,” said Lakshmi Iyer, chief investment officer (debt) and head (products) at Kotak Mahindra Asset Management Company Ltd.livemint