Union Bank likely to sell tier-2 bonds worth Rs 2,000 crore next week

Tier-2 bond sale plan comes amid sharp decline in bond yields

Public sector lender Union Bank of India is likely to issue tier-2 bonds worth Rs 2,200 crore next week in order to raise capital and fund strong demand for credit, sources told Business Standard.

The state-owned bank’s planned bond issuance comes amid a recent decline in yields on government bonds and consequently corporate debt. Lower bond yields imply cheaper access to debt for the entity looking to raise funds.

Union Bank’s proposed bond issuance is rated AA+ by CARE and Icra and has a tenure of 10 years with a call option after five years, the sources said. The date for bidding is likely November 28, they said.

According to treasury officials, the cutoff for Union Bank’s tier-2 bond sale would likely be 7.70-7.80 per cent, not much higher than prevailing yields of around 7.65 per cent for State Bank of India’s tier-2 bonds. The cutoff refers to the coupon or the rate of interest that Union Bank would pay to investors.

The likely firm demand comes at a time when lower supply of corporate bonds and a softening sovereign yield curve have made it cheaper to tap debt markets. Yield on 5-year and 10-year government bonds have declined 22 basis points and 16 bps, respectively, so far in November. Yields on corporate bonds have also declined around 15 bps over the last couple of weeks. Government bonds are the benchmarks for pricing corporate debt.

“Right now, the investor appetite in the market is quite strong because you don’t have too much supply of corporate bonds. An SBI tier-2 bond was traded at around 7.65 per cent levels recently,” a source said.

“Union Bank will likely do only one issue and if they want corporate bonds, investors would have to take that. Moreover, the yield curve is flat so investors cannot demand something like 7.90 per cent. Banks have not been raising too much of tier-2 bonds, they have been raising far more of tier-1 bonds,” the source said.

So far in the current financial year, banks have issued close to Rs 25,000 crore worth of additional tier-1 bonds. In the previous financial year, banks had issued AT-1 bonds worth a total of Rs 42,800 crore.

The fund-raising comes at a time when credit growth is showing strong momentum but deposit growth is lagging, bringing about the need for banks to mobilise funds. Latest RBI data showed that as on November 4, credit growth was at 17 per cent year-on-year, while deposit growth was at 8.2 per cent.