State Bank of India prices riskiest capital securities at record-low cost

State Bank of India (SBI) priced one of the riskiest bank capital securities at a record-low coupon, in the latest sign that investors are confident policy makers’ stimulus steps will help large issuers weather the Covid-19 pandemic.

SBI will sell Rs 4,000 crore ($545 million) of the so-called Additional Tier 1 bonds at a coupon of 7.74 per cent. That’s the lowest pricing on such debt, which can be fully written down in a crisis, issued by any lender since the country started implementing the stringent Basel III capital rules in 2013. Unprecedented stimulus steps from the authorities  have reduced average borrowing costs in the local credit market to the cheapest in more than a decade. 

While SBI has AAA credit scores from local credit firms, its AT1 offering is rated AA+ and can be called back by the lender after five years or any year thereafter. The issuance is solely being managed by SBI Capital, the person said, asking not to be identified as the details are private.

The measures have also given investors confidence that the country’s lenders will be able to beef up capital ratios in anticipation of more soured loans as the coronavirus batters businesses and leaves millions jobless.

Indian lenders still face serious challenges. They were already saddled with the world’s worst bad debt pile, and the pandemic is threatening to worsen creditworthiness at many borrowers. That environment makes the risks of AT1s more real. The authorities moved in March to seize beleaguered Yes Bank Ltd. and announced an unprecedented move to permanently write down its AT1 securities.

While SBI has AAA credit scores from local credit firms, its AT1 offering is rated AA+ and can be called back by the lender after five years or any year thereafter. The issuance is solely being managed by SBI Capital Markets, the person said, asking not to be identified as the details are private.