Canara Bank Issues AT1 Bond At 8.27%, Lower Than Market Expectations
The tier-I bond, which is rated AA+ by ICRA, carries a call option on the fifth year from the allotment date.
In what can be called the first successful tier-I bond issue of the current financial year, Canara Bank raised Rs 3,000 crore at a coupon of 8.27%, tighter than the market expectations of 8.30–8.35%, according to people with knowledge about the matter.
The issue had a base size of Rs 1,000 crore and a greenshoe option of Rs 2,000 crore. AT1 bonds are perpetual and have no maturity date, but banks have the option to call and redeem the amount every five or 10 years. Canara Bank has reserved the right to exercise the call option in the bond's fifth year.
Canara Bank garnered demand from usual investors of tier-I bonds, viz., insurance companies, pension funds, wealth management companies, and brokerages, the above-mentioned people told NDTV Profit.
While mutual funds participated in this bond issue, it was a smaller fraction of the overall demand, they said on the condition of anonymity.
This first tier-I bond of the current fiscal has come as the Securities Exchange Board of India said earlier this month that the valuation of tier-I bonds by mutual funds would be on a yield-to-call basis. This was a departure from the norms that it had introduced in March 2021, where it directed mutual funds to value these bonds as 100-year instruments.
The norms, introduced in 2021, had nearly killed the tier-I bond market as mutual funds—the largest investors of these papers—lost appetite after SEBI tightened valuation rules.
The positive response to Canara Bank's tier-I bond issue was also due to a lack of tier-I bond supply in the market, as most banks are looking to raise funds by way of equity and as others are well capitalised.
While the fine pricing on Canara Bank's bond has provided some direction towards the tier-I bond market, interest from mutual funds is yet to be watched out for.
Canara Bank's tier-I bond issuance, which is rated AA+ by ICRA, carries a call option on the fifth year from the allotment date. The bond issue will be allotted on Aug. 29, according to the merchant bankers.
The last time Canara Bank tapped the bond market with a tier-I bond issue was in February, when it raised Rs 2,000 crore at a coupon of 8.40%. It was fully subscribed.
