SBI opens dollar AT-1 door but peers won’t get a toehold
There was much elation about State Bank of India’s (SBI’s) maiden dollar Additional Tier-1 (AT-1) bonds issue. AT-1 instruments are bonds having equity-like perpetual existence, but they also pay a regular fixed coupon like any other debt instrument. These hybrid bonds enable banks to raise crucial Tier-1 capital and cannot be more than 2% of their total capital base.
SBI’s success in raising money comes at a time when public sector banks are in dire need of Tier-1 capital and some are even on the verge of slipping below the regulatory minimum of 7% under Basel-III norms.
But just like you do not get a loan when you need it most, banks hamstrung by their capital are unlikely to find eager investors for their perpetual AT-1 bonds. Their credit score, so to speak, is very low in the eyes of offshore investors. Firstly, most of the 21 listed public sector lenders, excluding the SBI group, have gross non-performing assets exceeding 10% of their total loan book. They have also been loss-making banks for FY16. The net interest income, which is the core income that a bank earns, grew at a measly 3.2% in the quarter ended June at an aggregate level for all these lenders.
With these performance metrics as reference, investors would probably baulk at taking not just a long-term view but a near-eternity view on a debt instrument.
Secondly, these loss-making banks are also facing faster depletion of their distributable reserves, which are used to make interest payments on AT-1 bonds. The risk to servicing of these bonds is hence fairly high.
And a third deterrent to investors would be the rating itself. SBI’s dollar AT-1 bonds are rated B1(hyb) by Moody’s Investors Service, two notches below its baseline credit assessment rating of ba1, because of the nature of the debt instrument. Other banks may end up with an even lower rating for their AT-1 bonds.
Investors will naturally ask for higher compensation to buy AT-1 bonds of other banks. Indeed, to bring down the coupon to 5.5%, SBI had to settle for a lower mop-up through its issue. The bank raised $300 million against the original $500 million. Other banks will have to price their AT-1 bonds dearer to lure investors.
Karthik Srinivasan, senior vice-president and co-head (financial sector ratings) at Icra Ltd, in a note dated 15 September, warned that risks associated with AT-1 bonds are higher than other instruments. “These bonds are perpetual in nature and the option to repay lies only with the bank issuing the bonds while the investors have to depend on the secondary market for an exit,” he said.
And this perhaps is the most crucial. Since AT-1 bonds had no precedence, investors didn’t have a handle on the secondary market liquidity. Despite these odds, SBI has opened the door to the offshore market. But, as things stand, it looks like its peers won’t get even a toehold in this new segment.
The writer does not hold positions in the companies discussed here.