Bank Of Baroda Concludes Fund Raising Via AT-1 Bonds
Pedestrians walk past a Bank of Baroda (BOB) branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Bank Of Baroda Concludes Fund Raising Via AT-1 Bonds

Government-owned Bank of Baroda raised Rs 764 crore through additional tier-1 bonds on Wednesday, according to two bankers familiar with the issue.

This was the first issue of AT-1 bonds since the Reserve Bank of India asked Yes Bank Ltd. to write-off such securities as part of its reconstruction plan, raising the risk perception associated with an investment in these bonds.

The AT-1 bond issue from Bank of Baroda had a base issue size of Rs 500 crore and a green shoe option of Rs 1,500 crore. The bank, however, accepted Rs 764 crore at a coupon of 8.25%, said two bankers aware of the development on the condition of anonymity. The bonds have a call option after five years from the date of issuance and every year thereafter.

There was ample demand for the AT-1 bonds, while spreads have widened compared to earlier issues, one of the two bankers quoted above said. The bank had bids for the whole Rs 2,000 crore but at a higher yield, this banker added. On December 18 2019, the bank raised Rs 3,397 crore through AT-1 bonds at a yield of 8.99%. However, since then benchmark government bond yields have fallen significantly.

“The response to our bond issue was quite encouraging and it was more than the issue size. So far, we have not planned for another issuance of AT-1 bonds, but we might tap the market, depending on market appetite and prevailing interest rate scenario,” says Subrat Kumar, general manager, treasury and global markets at Bank of Baroda.

The AT-1 bonds have a AAA credit rating from India Ratings and Research.

"Bank of Baroda’s capital buffers, along with its operating profits, provide it adequate cushion to absorb the likely rise in credit costs in view of the ongoing pandemic and also participate in the credit growth in the system," India Ratings said. It added that the bank is among the better-capitalised state-run banks with a common equity tier-I capital of 9.44% in 4Q FY20 and Tier-1 capital of 10.71%.

In April, the bank's board had approved raising Rs 13,500 crore of additional capital in FY21, of which Rs 4,500 crore would be raised through additional Tier-1 and Tier-2 capital instruments.

The AT-1 Saga

The risk associated AT-1 bonds issued by banks came under scrutiny in March after Rs 8,415 crore worth of AT-1 bonds issued by Yes Bank Ltd were completely written-off under the reconstruction scheme of the bank approved by the government and the Reserve Bank of India.

AT-1 bonds are risk absorbing instruments. As per regulations, a bank can skip coupon payment if its capital falls below a prescribed level. These bonds can also be written-off if a bank reaches ‘Point of Non Viability’. While these provisions have always existed in regulation, they were used for the first time in India in the Yes Bank case.

The second debt banker quoted above said that Yes Bank's case was a one-off event but it led to a significant rise in secondary market yields in AT-1 bonds, with investors selling AT-1 bonds of weaker banks at high discounts.

While the Bank of Baroda issue suggests demand for these securities hasn’t dried up fully, an issue from a private bank is yet to come to market to judge investor sentiment fully.

We will have to see the behaviour pan out during the coming AT-1 bond issuances by other banks and the real test will be how much private sector banks can raise and at what yields, the banker quoted above said.

Also read: RBI On Challenge To Yes Bank AT-1 Bond Write-Off: At Best An Investment Decision Gone Wrong

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