Tag: AT1 bonds

Canara Bank raises ₹1,500 crore via AT1 bonds

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Public sector lender Canara Bank has mobilised ₹1,500 crore in Basel III-Compliant Additional Tier 1 (AT1) bonds Series II, at a coupon rate of 8.05% per annum.

The issue received an overwhelming response from investors, with bids for more than ₹4,699 crore against a base issue size of ₹500 crore. Based on the response, the Bank has decided to accept ₹1,500 crore at a coupon rate of 8.05% per annum, according to a statement.

The AT1 instrument is perpetual in nature. However, the issuer can call back after five years or any anniversary date thereafter.

The Bank’s AT1 bonds are rated AA+ by CRISIL and India Ratings & Research Ltd.

This is the Second AT1 bond issuance of the Bank post the new SEBI regulations, During October 2021 bank has raised Basel III Compliant Additional Tier I bonds of ₹1,500 crore.

The Bank’s CRAR stood at 14.37% as of September 30, 2021 as compared to 12.77% as of September 30, 2020. The Bank had raised QIP to the tune of ₹2,500 crore during Q2FY22.

Canara Bank had indicated that its capital raising plans for FY22 included ₹4,000 crore via AT1 bonds and ₹2,500 crore in Tier 2 bonds.

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How you should choose from among the available AT1 bonds

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Ever since the default in AT1 (additional tier 1) perpetual bonds of Yes Bank, there has been lot of discussion on the risks of this instrument which was hitherto not understood or communicated. Here are some facts about AT1 bonds and how HNI investors can choose from among the available bonds for investment.

Risks

To recap, unlike in other bonds, there are two major risks in bank AT1 perpetual bonds. One, coupon discretion – the coupon or interest payable on these bonds can be serviced only if the bank is earning profits, or from certain permissible reserves.

That is, if a bank is loss-making or does not have adequate reserves, your coupon may not be paid. Two, loss absorption. The stark reality of this hit us in case of Yes Bank where the entire outstanding quantum of ₹8,415 crore was written off.

In this sense, bank AT1 perpetual bonds are similar to equity, that is if an issuer gets liquidated, the holders of the instrument have to participate in the loss. The additional learning in the case was that these instruments can be struck down even without touching the equity shareholders of the bank.

Apart from this, there is the issue of mis-selling too. In many cases, these instruments were sold as ‘similar to fixed deposits’ – buy into AT1 bonds of the same bank for higher returns. Returns are higher due to the risk factors and this needs to be understood.

Implicit safeguards

What then is the case for investment? Is it only the incremental return over the regular bonds issued by the same bank? No. There is also comfort from the fact that public sector banks have the implicit support of the Centre. This is not a stated guarantee like the ₹5 lakh insurance cover for bank deposits under Deposit Insurance Credit Guarantee Corporation (DICGC). However, this is a premise on which the bond market works which is not expected to be transgressed. There are instances of this implied support – when the AT1 bonds of certain loss making PSU banks were facing uncertainty, the regulator arranged premature call-back by all such banks. Apart from PSU banks, there are leading private sector banks too with sound fundamentals. Despite the write-down of AT1 bonds of one private sector bank, we cannot tar every bank with the same brush. While these bonds are perpetual, there is a call option at 5 years from issuance date and every anniversary thereof. Though it is only a call option and not a compulsion, bond market expects the call option will be exercised by the issuer and so far, call options have been honoured.

Suitability

On October 6, 2020, SEBI notified that for primary issuances of bank AT1 perpetual bonds after October 12, 2020, only Qualified Institutional Buyers are allowed and the allotment size and trading lot size shall be ₹1 crore. Individuals can purchase these AT1 bonds only from the secondary market but only in lot sizes of ₹1 crore.

However, for earlier AT1 bond issuances (prior to October 12, 2020), individuals can buy in lot sizes of less than ₹1 crore subject to the bond face value. For example, if the face value of one bond is ₹10 lakh, investment / trading can happen in multiples of ₹10 lakh. For buying AT1 bonds, investors have to approach wealth management firms and bond houses specializing in these bonds.

So, if you are an HNI investor, how do you choose from among the AT1 perpetual bonds available ? You can take the credit rating as one parameter to narrow down the choice. No bank has AAA rating for these instruments, due to the risks mentioned.

The highest credit rating assigned is AA+. In the public sector, AT1 bonds of State Bank of India and Bank of Baroda, and in the private sector, those of HDFC, ICICI and Axis have a AA+ rating. The returns can be another parameter.

Since there is no maturity, it is not yield-to-maturity (YTM) but the yield-to-call (YTC). Broadly, the YTC of AT1 perpetual bonds of these banks with a call option two to three years away, ranges from 6.25 per cent to 6.5 per cent and for those with five years to call, ranges from 7.35 per cent to 7.60 per cent in the secondary market.

The writer is a corporate trainer (debt markets) and author

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Banks approach RBI to raise limit for raising AT1 offshore, BFSI News, ET BFSI

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Mumbai: Indian banks are said to have requested the Reserve Bank of India that the limit on the overseas sale of bonds under the Additional Tier 1 category be raised to facilitate diversification of capital-raising resources, with the domestic market turning dry and inaccessible.

While State Bank of India was the first to sell such bonds this financial year in the local market, others such as Axis Bank and HDFC Bank have chosen overseas markets.

Banks are now permitted to raise up to 49 per cent of the eligible AT1 capital in foreign currency. However, a debate over what is eligible capital brewing.

The RBI did not reply to ET’s queries.

“While some wrote directly to the RBI seeking an increase in limit, others have represented through industry body,” said a senior executive involved in the matter told ET.

“The definition of eligible AT1 capital still needs some clarity and can be a conservative estimate,” the executive said.

According to the central bank’s regulation based on the latest international capital standard, the AT1 capital can be admitted maximum at 1.5 per cent of risk-weighted assets.

Banks have also sought clarity on this from the RBI, executives said.

AT1 or perpetual papers as they are known popularly are quasi-debt instruments, which bear a higher risk of capital losses and are rated at least three notches lower than an issuer’s corporate rating grade.

While SBI offered 7.72 per cent on the domestic turf Wednesday, Axis Bank paid 4.10 per cent in the international market.

Axis Bank’s credit is billed weaker than government-owned SBI. Had Axis Bank raised perpetual bonds in the local market, it would have been priced in the range of 8.25-8.70 per cent, according to local dealers.

If Axis Bank covers the currency risk for the whole overseas sale, the cost would be 9.5 per cent going by existing currency forwards rates, they said. However, it also depends on the usage of capital.

“If Axis Bank funds any assets overseas, there is no need for currency hedging for the same quantum, which in turn will help save costs,” said a senior executive involved in AT1 sales.

The local market has dried up completely after the Securities and Exchange Board of India tightened valuation rules for AT1 where mutual funds used to subscribe to a large share.

SBI had received 157 bidders from private banks, pension funds, corporate treasuries, bond houses and wealth managers for its offer.

Three top bond arrangers ET spoke with said Axis Bank would not have garnered interest like SBI. At the most, it would have received bids for Rs 500-750 crore compared with $600 million (or about Rs 4,400 crore) it raised on the offshore market.

Yield-hungry global investors look for three factors when it comes to AT1 from an emerging market: the financial matrix of the issuing bank and the bad loan position, the capability of exercising the call option and the ability to pay interest.

The principal and any accrued interest would be written down, partially or in full, if an issuing bank’s CET1 (common equity) ratio slips to 6.125 per cent later this year. The issuer cannot pay a coupon if it incurs losses in a financial year.

Such a scene does not augur well for any state-owned banks other than SBI as they are not in the pink of their health, dealers said.



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Axis Bank raises USD 600 mn via AT1 bonds, BFSI News, ET BFSI

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Axis Bank on Thursday said it has raised USD 600 million (around Rs 4,380 crore) through the sale of sustainability-focused AT1 bonds. The dollar-denominated, Basel III-compliant AT1 notes were finally priced at 4.10 per cent, 0.30 per cent lower than the initial price guidance, the bank said in a statement.

Under the Basel-III capital regulations, banks globally need to improve and strengthen their capital planning processes.

This is the maiden USD AT1 bond by an Indian issuer in a sustainable format and first time that the bank has accessed international bond markets after a 4-year hiatus.

The bank said the issue was oversubscribed 3.8 times ahead of the final pricing announcement and was well diversified across geographies and nearly half of the bonds were allotted to sustainability-focused investors.

The bank has set up a board-level ESG committee and has a sustainable financing framework, the statement said, adding that a second party opinion provider has graded it as ‘Credible & Impactful’.

“This successful transaction, which is also the largest single-tranche USD bond issuance ever for Axis Bank, reflects the faith and confidence that international investors have reposed in the bank’s franchise and robust credit and business model,” its group executive and head of treasury Neeraj Gambhir said.

The issue follows similar AT1 bond issuances by HDFC Bank (USD 1 billion) and SBI (Rs 4,000 crore) done over the last fortnight, which are seen as signs of interest revival in the instrument.

Merchant bankers had on Wednesday said that Bluebay, Blackrock, Fidelity and HSBC Asset Management Company were among the major investors in the issue.

The merchant bankers to the issue include Bank of America, BNP Paribas, HSBC, Citigroup and Standard Chartered Bank.



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Who wanted to own Adani Green and Axis Bank offshore bonds?, BFSI News, ET BFSI

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MUMBAI: Global investors including Blackrock, Lombard, Washington State Investment Fund, China Asset Management, Fidelity Investment, Goldman Sachs Private Bank were among others to bid selectively for offshore bonds, launched by Adani Green Energy and Axis Bank Wednesday.

Both the issuances obtained multiple times higher subscriptions with funding costs tightening by 30-33 basis points.

Axis Bank decided to retail about $600 million out of an estimated $2.3 billion subscription bids until publication of this report, sources said. Adani Green raised $750 million out of total bids estimated at $3.5 billion.

While Axis Bank sold Additional Tier 1 papers with ‘sustainable’ or ESG tag, Adani Green mopped up funds for capital investments.

“The issuer shall use the proceeds towards eligible green project categories and eligible social project categories set out in the issuer’s sustainable financing framework,” said the Axis Bank term sheet, seen by ET.

Adani was offering three-year securities with initial price guidance of 4.7 per cent. Axis perpetual papers were initially guided to offer 4.4 per cent, with a five-year call.

Adani Green yielded 4.375 percent finally, and Axis bonds likely settled at 4.10 percent, dealers said.

Oppenheimer, Emirates NBD, HSBC Asset Management L&R Capital, China Everbright Securities bid for Axis Bank papers. Besides, Credit Suisse AG and Hong Kong-based Gaoteng wanted to own Adani papers.

Adani Green will likely use the proceeds for “onward lending to issuer’s subsidiaries for capital expenditure requirements to fund the development of utility green projects”.

Both pricings are likely to be tighter by 20 basis points from initial guidance, executives said.

Last month, ET reported on both issues.

The bank is seeking to raise up to $1 billion, while Adani Green is attempting to garner about $700 million.

Global Rating company Moody’s assigned B1(hyb) or (B+ in simple rating terminology) grade to Axis bonds. The rating rank is three notches lower than the bank’s general creditworthiness.

On August 26, ET wrote that Axis Bank was planning to raise up to $1 billion via offshore AT1 bonds, also known as perpetual papers.

HSBC, Citi, MUFG, JP Morgan, Bank of America, BNP Paribas, Standard Chartered and Societe Generale are among others that are helping the bank sell those bonds to international investors.

This issue is the second after HDFC Bank tapped global investors for the first time raising AT1 securities for $1 billion.

On August 9, ET wrote that Adani Green Energy was set to raise about $600 million through overseas bonds to quicken the execution of renewable projects in the next two years.

Barclays, MUFG, DBS Bank, BNP Paribas, Standard Chartered, and Mizuho are among the investment bankers working on the deal.

Individual investment banks, investors and issuers could not be immediately reached.

Moody’s Investors Service assigned a Ba3 (or BB-) rating to the dollar-denominated debt securities of Adani Green.

While the Adani bonds will be listed on the Singapore Stock Exchange, Gujarat GIFT City is the fund-raising platform for Axis.



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SBI to float At-1 bonds in domestic market, will mufual funds buy?, BFSI News, ET BFSI

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After HDFC Bank and Axis Bank successfully raised Additional Tier 1 (AT1) bonds from overseas investors, the State Bank of India is set to test the local market this week with such bonds.

State Bank of India plans to raise up to Rs 4,000 crore selling AT-1 in the local market, first by a lender in this fiscal.

The At-1 market was almost dead after the Securities and Exchange Board of India earlier this year changed the valuation rules, which were partially rolled back later.

If the issue is successful, other lenders may tap the local market rather than the overseas market.

HDFC Bank and Axis Bank have eschewed the local market this year raising funds via the AT1 route in the overseas market.

SBI bonds

SBI bonds are expected to be up for bidding on Wednesday on the electronic debt bidding platform of stock exchanges. The bonds may offer between 7.90% and 8.10% with a five-year call option, which allows investors an exit route.

AT1, or perpetual bonds, do not have any fixed maturity.

The bonds are compliant with Basel-III, an international capital standard.

SBI Capital Markets is helping the bank raise the money. It has reached out to several local investors including private banks, corporate treasuries, bond houses, retirement bodies, wealth managers and insurers.

AT1 bonds are billed as quasi-equity securities that bear a higher risk of capital losses. These are generally rated three-to-four notches lower than an issuer’s corporate credit rating.

Local rating firms Crisil and India Ratings have graded the SBI’s paper AAplus with a stable outlook.

The mutual fund position

Mutual funds, which once used to buy heavily in AT1 bonds, are lukewarm about this asset class after the banking regulator last year ordered that these instruments be written off in Yes Bank’s state-sponsored bailout. Also, on March 10, Sebi had ordered mutual funds to cap ownership of bonds with special features at 10% of the assets of a scheme and value them as 100-year instruments from next month, potentially triggering a redemption wave. Later, the capital markets regulator eased valuation rules but with some riders after the finance ministry asked it to withdraw the directive to mutual funds.

The muted response by MFs had prompted the lenders to tap the overseas market

Perpetual bond sales by banks have nearly halved to Rs 18,772 crore in FY21 from Rs 34,860 crore three years earlier.



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Axis Bank to now raise up to $1 billion via overseas AT1 issue, BFSI News, ET BFSI

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MUMBAI: Axis Bank joins its bigger peer HDFC Bank in selling Additional Tier 1 (AT1) bonds overseas, seeking to garner up to $1 billion in ESG-compliant instruments that should help the Mumbai-based private sector lender reduce its financing costs.

The ‘ESG’ (Environment Social Green) tag should lower the coupon in this round of offering by about 15 basis points, compared with the usual AT1 sales by similarly rated entities, four people familiar with the matter told ET. ESG funds are deployed in green and sustainable projects.

The bank has appointed about 10 investment bankers, including HSBC, Citi, MUFG, JP Morgan, Bank of America, Standard Chartered and Societe Generale.

Axis Bank did not reply to ET’s query. Investment banks couldn’t immediately be reached for comments.

Axis Bank is seeking to raise between $600 million and $1 billion depending on investor demand and pricing.

The initial price guidance could be in the range of 4-4.20 per cent, which would have been higher without the ESG tag, sources said. The ultimate pricing could be lower than the broad initial guidance.

The issue is expected to be launched in a week or two from Gujarat GIFT City depending on the outcome of the Jackson Hole policy meeting in the US, sources said.

“If Jackson Hole does not spring any negative surprise, roadshows are expected to begin from next week,” one of the persons cited above told ET.

The US Federal Reserve will hold its annual economic symposium in Jackson Hole, Wyoming, this Friday on August 27.

Earlier this month, HDFC Bank raised $1 billion amid overwhelming investor response.

Due to high demand, the pricing of those bonds was tightened by 43 basis points from the initial guidance to 3.70 per cent.

Axis Bank will have to offer more than this as the lender may be rated at least one notch lower than the HDFC Bank’s grade. Axis AT1 is expected to be graded as B+ or B, dealers said. The rating isn’t finalized yet.

Global rating company Moody’s rated them as Ba3 (or BB- in simple rating terminology), three notches below the deposit ratings.

A single notch by way of a lower rating can trigger a price differential of 50 basis points for a similar instrument, dealers said.

“The proposed ESG compliant papers will help cut the additional funding cost while creating space for expanding loans for sustainable projects,” said a senior executive involved in the deal.

AT-1 bonds are billed as quasi-equity securities that bear a higher risk of capital losses. Those are generally rated three-to-four notches lower than an issuer’s corporate credit rating.

Axis Bank’s overall capital adequacy ratio (CAR) was at 19.01 per cent in the June quarter with the CET1 (Common Equity) ratio at 15.2 per cent, much above the threshold limit.

Those gauges were at 17.47 per cent and 13.50 per cent, respectively, in the corresponding period a year ago.

The principal and any accrued interest would be written down, partially or in full, if Axis Bank’s CET1 ratio slips to 6.125 per cent later this year.



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HDFC Bank approves issuance of debt instruments in the form of AT1 bonds from overseas markets

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HDFC Bank on Monday said it will issue debt instruments in the form of Additional Tier 1 bonds in international markets. “…we had informed the stock exchanges that the Board of Directors of HDFC Bank in its meeting held on July 17, 2021, is contemplating raising of long term funds through the issuance of Basel III compliant Additional Tier 1 Bonds (Notes), in the international markets, subject to market conditions,” it said in a stock exchange filing.

An offering memorandum has been prepared and shall be made available to the prospective investors in relation to the contemplated issue of Notes, it further said. The bank, however, did not specify the amount to be raised.

Ba3 (hyb) rating

Meanwhile, Moody’s Investors Service in a statement said it has assigned a Ba3 (hyb) rating to HDFC Bank’s proposed USD-denominated, undated, non-cumulative and subordinated AT1 capital securities. “The Ba3 (hyb) rating is three notches below HDFC Bank’s baa3 Baseline Credit Assessment (BCA) and Adjusted BCA, reflecting the probability of impairment associated with non-cumulative coupon suspension, as well as the likelihood of high loss severity when the bank reaches the point of non-viability,” it said. In its meeting on July 17, the bank’s board had approved the issue of standalone foreign currency-denominated Perpetual Debt Instruments as Basel III-compliant AT1 bond for foreign (global) investors outside India, on an unsecured , public or a private placement basis, along with a proposed listing of the AT1 Bonds and other related activities in the course of the financial year 2021- 22, subject to market conditions and applicable approvals.

Also read: Is HDFC Ergo Optima Secure value for money?

Earlier, the State Bank of India had also raised capital by AT1 bonds in the overseas market. The capital raised through the AT1 bonds will help enhance the bank’s capital base. HDFC Bank’s total Capital Adequacy Ratio was at 19.1 per cent as on June 30, 2021 as against a regulatory requirement of 11.075 per cent.

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HDFC Bank’s AT1 bonds get Moody’s Ba3 rating, BFSI News, ET BFSI

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MUMBAI: HDFC Bank‘s proposed Additional Tier 1 (AT1) bonds have been rated Ba3, three notches below their deposit ratings by Moody’s, with limited likelihood of any rating upgrade in the next 12-18 months due to possible weakness in sovereign rating and the likelihood of rising bad assets in the Indian financial system.

The bank will be the first private sector lender to offer those quasi-equity securities offshore if it finally launches the overseas sale that is expected to open for subscription in the next 7 days.

HDFC Bank will likely set a benchmark for many other local lenders including Union Bank of India, State Bank of India and Axis Bank.

S&P is also expected to come out with a similar rating grade for HDFC Bank’s AT1 series.

The initial guidance is likely to be less than 4 per cent, although it could finally settle anything between 3.5 per cent and 4 per cent, said people familiar with the matter. The size of the issue is expected to be in the range of $500 million to $1 billion depending on investor demand, ET reported on July 29.

“Roadshows have just begun across the world,” one of the persons cited above said.

In between, there were hard negotiations for the pricing particularly after a Thai bank raised AT1 at about 4 per cent two weeks ago.

The borrower is actually looking for 3.5 per cent, which looks tough. Still, there will be good demand for any paper series, branded with the HDFC mark, dealers said.

HDFC Bank and individual investment bankers could not be contacted immediately for comments.

Nearly a dozen banks have been appointed to help the proposed bond sale. Those banks include Barclays, Bank of America, Citi, HSBC, JP Morgan, Standard Chartered, MUFG, Sofgen, BNP Paribas and Morgan Stanley.

AT1, also known as perpetual bonds, add to banks’ capital base unlike perpetual papers issued by any corporate. Such securities do not have any fixed maturity but generally have a five-year call option that allows an exit route for investors.

“The Ba3 (hyb) rating is three notches below HDFC Bank’s baa3 Baseline Credit Assessment (BCA) and Adjusted BCA, reflecting the probability of impairment associated with non-cumulative coupon suspension, as well as the likelihood of high loss severity when the bank reaches the point of non-viability,” Moody’s said in a report Monday.

The principal and any accrued but unpaid distributions on these capital securities would be written down, partially or in full, if HDFC Bank’s common equity tier 1 (CET1) ratio is at or below 5.5 per cent any time prior to 1 October 2021, and 6.125 per cent from and including 1st October, 2021.

In such a scenario, the write-down may be temporary, and the amount could be reinstated subject to the Reserve Bank of India‘s (RBI) conditions, Moody’s said.

“A lowering of HDFC Bank’s BCA (Baseline Credit Assessment) will lead to a rating downgrade of the proposed AT1 securities,” Moody’s added.



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HDFC Bank approves issue of AT1 bonds

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HDFC Bank on Monday said it will issue debt instruments in the form of Additional Tier 1 bonds.

“We had informed the stock exchanges that the Board of Directors of HDFC Bank in its meeting held on July 17, 2021, is contemplating raising of long term funds through the issuance of $ Basel III Compliant Additional Tier 1 Bonds (Notes), in the international markets, subject to market conditions,” it said in its filing.

An offering memorandum has been prepared and shall be made available to the prospective investors in relation to the contemplated issue of Notes, it further said.

The bank, however, did not specify the amount to be raised.

10 top banks create secondary market for corporate loans

Meanwhile, Moody’s Investors Service in a statement said it has assigned a Ba3 (hyb) rating to HDFC Bank’s proposed USD-denominated, undated, non-cumulative and subordinated AT 1 capital securities.

“The Ba3 (hyb) rating is three notches below HDFC Bank’s baa3 Baseline Credit Assessment (BCA) and Adjusted BCA, reflecting the probability of impairment associated with non-cumulative coupon suspension, as well as the likelihood of high loss severity when the bank reaches the point of non-viability,” it said.

In its meeting on July 17, the bank’s board had approved the issue of standalone foreign currency denominated Perpetual Debt Instruments as Basel III compliant AT 1 bonds to foreign (global) investors outside India, on an unsecured basis, on a public or a private placement basis, along with a proposed listing of the AT1 Bonds and other related activities in the course of the financial year 2021- 22, subject to market conditions and applicable approvals.

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