PNB, IOB, DCB bank to offer AT1 bonds; may have to offer premium rates

Punjab National Bank (PNB), Indian Overseas Bank (IOB), and DCB Bank may have to offer higher interest rates on their bonds as they plan to sell them at a time when global banks have come under immense pressure, according to a report published in The Economic Times (ET). 

 

The troubles have been exacerbated after the Swiss regulator decided to write down nearly $17 billion of Additional Tier 1 (AT1) instruments in the Credit Suisse bailout.

 

PNB will begin bidding for its AT1 bonds on March 24. The report says the lender plans to raise a base issue of Rs 500 crore and a green shoe issue of Rs 1,500 crore. The final price is yet to be decided.

 

The report added that India Ratings has assigned an AA+ rating to the AT1, or perpetual, bond issue.

 

PNB's current rate for perpetual bonds sits in the range of 8.75-8.80% range. The report quoted industry experts: "Expected pricing for the bond is 9%, although the bank previously raised Rs 582 crore AT1 priced at 8.40% in December 2022."

 

Separately, IOB plans to raise Tier II capital with a base issue of Rs 200 crore and a green shoe of Rs 800 crore. On the other hand, DCB is preparing to raise Tier II bonds with a base issue of Rs 250 crore and a green shoe of Rs 50 crore, ET reported.

 

It is important to note that AT1 bonds are unsecured, perpetual bonds that banks issue to improve their core capital base. The bank keeps the money raised through these bonds as a shock absorber. Banks can convert AT1 bonds to equity or write them down when in trouble.

 

During a bailout three years ago, the Reserve Bank of India (RBI) had to write down Yes Bank's outstanding AT1 bonds. Investors have witnessed the fall of Credit Suisse and Yes Bank's AT1 bonds, making them sceptical.

 

Additionally, DCB will launch the bidding for its Tier II bond issue on March 27 at an interest rate of 9.35%, the report said. IOB will launch its own bidding process on March 23. However, the prices have not yet been decided.