- State Bank of India (SBI)’s extra tier-1 (AT-1) bond issue received a very low response from investors, raising only 3,101 crore against an issue size of 10,000 crore.
- Impact on Market Sentiment: The lacklustre reaction is expected to depress market sentiment and make fundraising more difficult for other PSU banks, potentially leading to fundraising delays.
What are AT1 Bonds?
- AT-1 bonds, also known as Additional Tier-1 bonds, are unsecured, perpetual bonds issued by banks to supplement their core capital base in accordance with Basel-III standards.
- AT-1 bonds are complicated hybrid securities that are best suited for institutions and skilled investors who can analyse their terms and assess whether the higher returns pay for the higher risks involved.
- Face Value: Each AT-1 bond has a face value of Rs. 10 lakh.
- Retail investors can obtain these bonds through initial private placement offers made by banks or by purchasing already-traded AT-1 bonds in the secondary market based on broker recommendations.
AT1 Bonds’ Key Characteristics and Importance Perpetual Nature:
- AT-1 bonds have no maturity date. Instead, they contain call options that allow banks to redeem them after a set period of time, typically five or 10 years. Banks can choose to pay solely interest on bonds in perpetuity without redeeming them.
- Interest Payment Flexibility: Banks issuing AT-1 bonds can miss interest payments or even reduce the face value of the bonds if their capital ratios fall below specific levels stipulated in the offer terms.
- Regulatory Intervention: If a bank is in financial trouble, the RBI has the right to order the cancellation of its outstanding AT-1 bonds without consulting the investors.
Source: https://www.livemint.com/industry/banking/what-are-additional-tier-1-bonds-11683106979285.html