Tag: AT-1

The Government’s plan to privatise two public lenders could lead to a material negative migration of long-term issuer ratings, as well as ratings on Tier-II instruments of the banks, specifically amongst the weaker non-consolidated ones, said India Ratings (Ind-Ra). The ratings agency said the government’s outline of privatising, rather than divesting, could translate to ceding both the majority shareholding as well as control over the banks – which have not been formally identified yet.

“The agency believes ceding of control should make the proposal attractive for potential investors and may make it more viable to attract a large quantum of capital that this exercise may require,” said Ind-Ra in its assessment.

The ratings agency said it had a long-term issuer rating floor of IND AA, for government majority owned banks, which factored along timely government intervention and thus, minimal default probability. Hybrid instruments, such as AT-1 instruments, were rated on their standalone profiles – which factored in ordinary support from the government, largely due to the terms of Hybrid instruments which could prevent government support. “Ind-Ra’s rating of AT1 instruments for weaker government banks could be multiple notches below the long-term issuer rating, factoring the inherent weakness of the institutions along with discretionary nature of the security which could impact its ability to service the instrument,” noted the agency.

Ind-Ra, citing the example of IDBI Bank, the only lender the government has thus far ceded majority control in, said it would as per its criteria place the ratings on a rating watch, and accordingly take rating calls based on the ‘final contours’ of the transaction.