SEBI Allows Glidepath For Valuation Of Perpetual Bonds
Revised SEBI circular offers valuation relief to mutual funds and allow banks to continue raising funds via AT-1 bonds.
The Securities and Exchange Board of India has issued a clarificatory circular revising the deemed residual maturity period for Basel III AT-1 and Tier 2 bonds.
That comes after the market regulator, through a March 10 circular, had asked mutual funds to treat the maturity of all perpetual bonds as 100 years from the date of their issuance for the purpose of valuation. So far, perpetual bonds have been valued by funds on a yield-to-call basis.
SEBI’s earlier circular received mixed reactions from the industry, while the Finance Ministry asked the regulator to withdraw its guidelines citing potentially large mark-to-market losses for mutual funds and difficulties in capital raising by banks.
As per the revised circular the deemed residual maturity for Basel III AT-1 bonds will be:
- 10 years — for call option up to Mar. 31, 2022.
- 20 years — for call option falling between Apr. 1- Sep. 30, 2022
- 30 years — for call option falling between Oct. 01, 2022 to Mar. 31, 2023
- 100 years — for call option for period Apr. 01, 2023 onwards
The deemed residual maturity for Basel III Tier-2 bonds with a call option up to Mar. 31, 2022 will be 10 years or the contractually agreed maturity period - whichever is earlier. For time periods thereafter the contractually agreed maturity periods will apply.
The regulator also clarified that in case the issuer does not exercise call option then the valuation will be done considering maturity of 100 years from the date of issuance of not just that bond series but all such bonds issued by the entity. This would be the case even if the non-exercise of the call option is due to the financial stress of the issuer or any other adverse news.
The overall impact of this new framework will be in the range of 25-35 bps on bond yield, with the price impact in the range of 2-3%, said a senior executive at a leading asset management company on condition of anonymity. To be clear the price impact will increase as the tenure of the bond rises. The 100-year tenure will have a higher price impact.
The market regulator has advised the Association of Mutual Funds in India to issue detailed guidelines for valuation of bonds issued under the Basel-III framework which will be implemented by April 01, 2021.