The State Bank of India (SBI) has issued new tier 1 bonds (AT1 bonds) for about Rs 3,974-crore. The AT1 bonds carry a coupon of 7.55 percent, which is 17 basis points less than the last paper in September 2021.
What are AT1 Bonds?
AT, Additional Tier 1 bonds are perpetual debt securities used by banks for enhancing their core equity base and thus complying with Basel III norms. After the global financial crisis, these bonds were introduced to protect depositors.
Bonds with AT1 ratings offer better returns than other bonds, but they do not have a maturity date like other bonds. These bonds are not suitable for regular income and capital safety investors. The Additional Tier 1 bond, or AT1, is part of a family of bank capital securities known as Contingent Convertibles, or ‘Cocos’. These bonds are issued by banks to contribute to their regulatory capital requirements.
The issuing bank pays the coupon (interest) to all investors in AT1 bonds, including individuals, regardless of whether the IM includes them as eligible. This means that the IM is more relevant to the primary than to the secondary market. By issuing AT1 bonds, the State Bank of India raises Rs 3,974 crore in capital. AT1 bonds of Rs 1,500 crore are likely to be rolled out by Union Bank next week
According to bond dealers, the SBI offering received a good response. Though the indicative size was Rs 4,000 crore, it received over Rs 6,000 crore in bids. SBI chose a coupon of 7.55 percent on an issue size of Rs 3,974 crore.
Dealers said that the bank had issued AT1 bonds for Rs 4,000 crore at 7.72 percent in September 2021. Rating upgrades for AT1 bonds have helped it to raise funds at cheaper rates (lower coupon rates) in fresh issues of bonds since then.
Increasing interest has been shown in the instruments of public sector banks (AT1 bonds) as the bad loan situation has improved, recoveries have improved and the probability of further stress is decreasing. Canara Bank raised Rs 1,500 crore through ATI bonds in November 2021. The bank received a total bid amount of Rs 4,699 crore, of which Rs 1,500 crore was accepted at a coupon rate of 8.05 percent. Next week, Union Bank will issue AT1 bonds worth Rs 1,500 crore.
In addition to SBI’s dominant market position in the Indian banking industry, its strong resource profile, and adequate capitalization, these bonds will replace the existing AT1 instruments that will mature over the next few years.
Strong support from the Government of India, the bank’s majority owner, is also factored into the ratings, both continuously and in the event of distress. However, the modest asset quality of the financial group partially offsets these positive factors. AT 1 bonds are regulated by the Reserve Bank of India (RBI), which allows the issuing bank to control coupon payments at all times. A bank may not pay a coupon if it lacks sufficient distributable reserves to service the coupon on AT 1 bond.
