UCO Bank raises Rs 500 crore in AT1 bonds at 9.5%, highest rate in FY23

State-owned UCO Bank on Thursday sold additional tier-1 (AT1) bonds worth Rs 500 crore at a coupon rate of 9.5 per cent, the highest rate paid by any bank so far in the current financial year, sources told Business Standard.

The coupon rate is the rate of interest that is periodically paid out to investors. Analysts said the high coupon rate was driven by factors specific to the issuing entity, tighter financial conditions, and the nature of AT1 bonds as an instrument.

AT1 bonds are a means by which banks augment core equity capital. These instruments are perpetual bonds, which means that while issuers provide periodic interest payments, there is no redemption of the principal amount. The appeal for investors lies in the fact that the returns that AT1 bonds fetch are typically higher than tier-2 bonds and fixed deposits.

Rates set on fresh issuances of AT1 bonds had hardened earlier in 2023 as persistently elevated inflation prints both in India and the US had led to apprehensions of a longer-than-expected monetary tightening cycle.

The resultant rise in yields on government bonds — and correspondingly corporate bonds — had made it more expensive for banks to raise funds through the debt capital route. Government bond yields are the benchmarks for pricing debt issued by corporate entities.

On March 8, State Bank of India, the country’s largest lender, had sold AT1 bonds worth Rs 3,717 crore at a coupon rate of 8.25 per cent, the highest the bank has paid so far in the financial year.

SBI had originally planned a bond sale worth a total of Rs 5,456 crore, including a greenshoe option of Rs 3,456 crore. In September 2022, SBI had issued AT1 bonds at a coupon rate of 7.75 per cent.

Traders, however, said that going ahead, the environment for debt had become increasingly uncertain following the collapse of the US-based Silicon Valley Bank and stress in other US and European banks.

With the turbulence in the global banking sector leading to hope of central banks slowing down monetary tightening, bond yields eased sharply in the US this week, in turn pushing down yields on Indian government bonds. US bond yields also fell as investors preferred the safety of American sovereign debt amid the global risk aversion.

“If we look at domestic AT1 bond issuances — last year there was a large decline in spreads between senior bonds and AT1 bonds as the demand was very good. Right now, it is not like spreads have blown out. Yes, at an absolute level, AT1 coupons have risen but the spreads for highly-rated issuers remain at decent levels,” a treasury official with a private bank said.
 

A LOOK AT THE MARKET

• On March 8, SBI sold AT1 bonds worth Rs 3,717 crore at a coupon rate of 8.25%
• In September 2022, SBI issued AT1 bonds at a coupon rate of 7.75%
• Rates set on fresh AT1 bond issuances hardened earlier in 2023 due to elevated inflation prints
• Traders say environment for debt has become increasingly uncertain following the Silicon Valley Bank collapse and stress in other banks