Credit Suisse crisis unlikely to spook domestic AT-1 bond investors: Report

The write-down of $17 billion worth of contingent convertible bonds of Credit Suisse has brought to the fore risks surrounding Indian additional tier-1 (AT-1) bonds, which are instruments of a similar nature, said Business Standard.

However, it said that analysts believe this is unlikely to have a substantial impact on domestic AT-1 bond issuances by banks.

It noted that following the regulatory changes taken after the YES Bank fiasco in 2020, the domestic landscape for AT-1 bonds has significantly improved.

In the first such bond sale following the Credit Suisse episode, state-owned lender Punjab National Bank (PNB) is set to issue AT-1 bonds worth ₹2,000 crore on Friday, sources told the market daily. Treasury officials expect the coupon for PNB’s bonds to be set around 8.50 percent, not much above the 8.25 percent set for SBI’s last AT-1 bond sale on March 8, the report added.

Considering the fragile sentiment currently prevailing in the global banking sector, the expected rate of interest for PNB’s AT-1 upcoming issuance suggests that domestic investors for these securities are not too concerned, said the report.

Analysts, however, told BS that the fund-raising through AT-1 bonds is likely to become more expensive, in line with higher bond yields across the board.

With inflation remaining elevated, the possibility of more rate hikes by the RBI cannot be ruled out. The sovereign bond market is set to see a record-high supply of bonds, starting in April. Consequently, the bias for bond yields is likely to be on the higher side, the report said quoting analysts.

Government bonds are the benchmarks for pricing corporate debt, noted the report, adding that the yield on the 10-year benchmark bond had climbed as much as 14 basis points, so far in 2023, before softening over the last couple of weeks.

Analysts, as per the report, said that high net-worth individuals could also demand higher yields from banks’ AT-1 bonds going ahead as yields on papers issued by large NBFCs were currently much higher. Moreover, with bank credit growth expected to slow in the next fiscal year, the need for banks to issue AT-1 bonds could reduce.