Brand New Avenue

On September 14, the country’s largest lender SBI raised $300 million via the issue of dollar denominated additional tier-1 (AT-1) bonds or perpetual bonds in the overseas market. This is the first time that an Indian bank is raising funds through an offshore AT-1 bond issue under Basel-III norms.The notes that SBI issued have a yield of 5.5% and would be listed on the Singapore Stock Exchange. Moody's Investors Service has assigned a B1 (hyb) rating to the bonds.

The SBI issuance opens up a benchmark or a proxy for pricing other such issuances by Indian lenders. In other words, investors in the overseas market can take this pricing as a benchmark to evaluate the yield for similar instruments from Indian lenders. SBI chief financial officer Anshula Kant says the lender wanted to open up another source of tier-1 capital and their focus was on setting up a benchmark and getting a fine pricing.

We wanted to broaden the spectrum. Overseas investors were not really aware of the structure of AT-1 bonds that RBI had prescribed. So this issue was, in many ways, a familiarisation exercise for overseas investors. I think we got good quality investors although the ticket size was small. Our endeavour was not to raise a huge amount of capital but to keep the price tight and see how it goes,” Kant explains.

AT-1 bonds are different from the conventional non-conventional debentures (NCDs). An NCD is simply a paper issued by a company or a bank which pays a certain interest rate every year for a given period of time. On maturity, the issuer pays back the principal amount to the investors.

However, in an AT-1 or perpetual bond, there is no fixed maturity. As the name suggests, the investment tends to be perpetual—investors might have to hold the notes for an unknown period of time. These bonds, however, have a call option with a given period post which the issuer has an option to call back the paper and pay the principal. AT-1 bonds are also considered as quasi-equity and are used to shore up the tier-1 capital of banks.

One reason why overseas investors have not shown much keenness in this segment is the unfamiliarity with the structure of the instruments in India as it varies a bit from that of a European/American hybrid instrument. The banks’ credit quality in India has also been an issue over the last few years due to rising NPA issues that in turn leads to a higher yield demand by investors.

SBI’s issuance was not just a simple fundraising by a bank. It just carved a door into the overseas perpetual debt market which was so far untapped by Indian lenders under the current Basel-III norms. Chinese banks are known to be active in the offshore perpetual debt market.

A few months back, IDBI Bank was reportedly engaged in talks with overseas investors for the issuance of their overseas AT-1 bonds. Market experts now believe there could be more issuances by Indian public sector banks under this segment in the coming times.

Alka Anbarasu, vice-president and senior analyst, Moody's pointed out in a note that the ratings agency expects more Indian banks to consider raising capital via this route to overcome some of the limitations of the domestic bond market. “In particular, most Basel III  securities issued by the banks domestically have been privately placed, thereby offering limited liquidity for investors," Anbarasu wrote.