PSU banks wary after SBI’s dismal AT-1 bond issue

Subject : Economy

Section: Monetary Policy

Concept :

The underwhelming subscription to State Bank of India (SBI)’s additional tier-1 (AT-1) bond issue on Thursday has dampened market sentiment and is expected to make fund-raising harder for other PSU banks, even leading to delays in certain cases.

Additional Tier – 1 Bonds

AT-1 bonds are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
There are two routes through which these bonds can be acquired:
Initial private placement offers of AT-1 bonds by banks seeking to raise money.
Secondary market buys of already-traded AT-1 bonds.
AT-1 bonds are like any other bonds issued by banks and companies, but pay a slightly higher rate of interest compared to other bonds.
These bonds are also listed and traded on the exchanges. So, if an AT-1 bondholder needs money, he can sell it in the secondary market.
Investors cannot return these bonds to the issuing bank and get the money. i.e there is no put option available to its holders.
However, the issuing banks have the option to recall AT-1 bonds issued by them (termed call options that allow banks to redeem them after 5 or 10 years).
Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value.
AT-1 bonds are regulated by RBI. If the RBI feels that a bank needs a rescue, it can simply ask the bank to write off its outstanding AT-1 bonds without consulting its investors.