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Informist, Wednesday, Aug 7, 2024

 

By Vaishali Tyagi

 

MUMBAI – Canara Bank may be the first lender to come up with an offering of additional Tier-I bonds since the recent relaxation of mutual funds' valuation methodology for these papers. The state-owned lender is looking to raise funds through perpetual bonds later this month, but the quantum of issuance and the allotment date of the bonds have not been finalised, sources aware of the discussions said. 

 

A perpetual bond is a debt instrument that has no maturity date. The issuing entity pays out interest on the bond value at a predetermined rate. Since there is no maturity date, a perpetual bond is not redeemable.

 

"Canara Bank was thinking about exploring, and they may come with a perpetual bond post the central bank's (Reserve Bank of India) monetary policy meeting outcome, and it is under discussion," a dealer at a mid-sized brokerage firm said. The RBI's Monetary Policy Committee outcome is due Thursday.

 

The Reserve Bank of India's rate-setting panel is expected to keep the repo rate and the policy stance unchanged this week with inflation still running above the central bank's target and growth staying robust, according to an Informist poll of 30 analysts. 

 

The perpetual bond offering may benefit from a revival in investor appetite for these papers following the recent revision of valuation norms. On Monday, the Securities and Exchange Board of India said that mutual funds can value their additional tier-1 bond holdings at the bond's call option date, or yield-to-call, relaxing the earlier requirement of valuing these as 100-year securities.

 

The last issuance of additional tier-I bonds was by HDB Financial Services on Jul 12. HDB Financial Services raised 3.5 bln rupees at a coupon of 8.71%.

 

Additional tier-I bonds were popular instruments for banks to raise quasi-equity capital, especially for larger public sector and private sector banks, but that hit a wall once the YES Bank resolution plan in March 2020 led to such bonds being written off when the bank faced a crisis. 

 

This increased the regulatory scrutiny on risks that investors were taking on through these bonds, which in turn prompted investors to demand higher returns for taking on the additional risk. Consequently, it became unviable for some lenders to sell these papers.

 

The change in norms reduces the risk exposure associated with perpetual bonds, making them more attractive to investors. This in turn may prompt more corporate entities to issue their own perpetual bonds. 

 

Dealers said that the issuance of perpetual bonds by Canara Bank is expected to be closely watched by the market to gauge investor appetite. "We may see some more perpetual bond issuances as it will attract more investors, still it will be too early to say anything as of now, but we expect more issuances to tap the market," a dealer at a mid-sized brokerage firm said. 

 

Last month, Canara Bank had raised 100 bln rupees through infrastructure bonds maturing in 10 years at a coupon of 7.40%, Informist Media reported. The issue had a base size of 50 bln rupees and a greenshoe option of another 50 bln rupees, and it was fully subscribed. 

 

The bank's Basel-III capital adequacy ratio was at 16.38% as of Jun 30. While releasing the Apr-Jun earnings, the bank's management said the bank was well capitalised and doesn't need to raise capital. Still, the prospect of issuing a finely priced paper may have changed their minds, dealers said.  

 

Today, shares of the state-owned bank ended 3.04% higher at 108.22 rupees on the National Stock Exchange. End

 

Edited by Akul Nishant Akhoury

 

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