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PFC to invest into Andhra Bank’s perpetual bonds

After investing in Dena Bank’s additional tier-I (AT-1) bonds, Power Finance Corporation (PFC) has made a second bid in Andhra Bank. It is believed to have invested Rs 800 crore in Andhra Bank’s additional tier-I (AT-1) bonds. The bonds carry a coupon rate of 10.95%.

Andhra Bank informed BSE that it has placed a private placement issue of unsecured non-convertible Basel-III compliant 10.95% AT-1 bonds that opened on February 17 and closed on February 19.

The bank has received the entire issue amount of R800 crore and the allotted bonds will be credited to the investor DEMAT account through necessary corporate action within two working days from the date of allotment.

What was its need for Andhra Bank?

Under Basel-III norms, banks are required to increase their Tier-1 capital to insulate them from market failure. Tier-1 capital is considered most secured form of capital.

What is Tier-1 capital?

Tier 1 capital = Core Tier 1 capital + Other qualifying Tier 1 capital securities.

Tier one capital can absorb losses without a bank being required to cease trading.

Core Tier 1 capital

= Paid up Capital (Originally paid) + Retained Profit – Accumulated Loss

= Paid up Capital (Originally paid) + Disclosed Reserve

Why banks have to offer such a high interest rate?

  1. Employees’ Provident Fund Organisation (EPFO), one of the largest investor in the debt market, can’t invest more because of the last year’s notification. According to this notification, EPFO’s investments in tier-I bonds should not exceed 2% of the total portfolio of the fund.
  2. Life Insurance Corporation (LIC), the other largest investor, cannot invest in AT-I bonds.
  3. Moreover, the bonds should also have a minimum rating of AA or an equivalent rating.
  4. So, in the absence of LIC and EPFO, other players have gained bargaining power and driven up yields.

What are the expectations of Bankers with regard to AT-1?

Bankers are hoping the ease of norms and expansion of the horizon of investors.

  1. They hope that the Union Budget for 2016-17 would contain provisions that will make more players eligible to invest in AT-I bonds, i.e. they hope that the limitations on EPFO & LIC would be removed.
  2. They want relaxation in minimum rating requirement for the investment.

What is AT-1 bond?

  1. It does not have a fixed maturity date
  2. Because of its perpetual nature, investors seek higher yield
  3. Funds raised via AT-1 bonds help shore up tier-1 capital
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