Canara, Union Bank to raise around Rs 4,000 cr via AT-1 bonds by next week

Union Bank plans to raise up to Rs 2,000 crore while Canara Bank plans to issue AT-1 bonds worth up to Rs 2,000 crore, say sources

State-owned lenders Union Bank of India and Canara Bank plan to raise a total of around Rs 4,000 crore through the issuance of Additional Tier-1 (AT-1) bonds by early next week, sources told Business Standard.

Union Bank plans to raise up to Rs 2,000 crore while Canara Bank plans to issue AT-1 bonds worth up to Rs 2,000 crore, the sources said.

“They (Union Bank) had a meeting at the end of last week – an arranger meeting. They have taken a rating for Rs 2,000-crore bonds,” a treasury official aware of the developments said.

“Union Bank is open to taking a larger amount only if they are comfortable with the coupon, they want it around 8.65%. It should come within a week,” the official said.

The ratings sought for both Union Bank and Canara Bank’s bond issuances are AA+, sources said.

Canara Bank aims to issue the AT-1 bonds at a coupon – or rate of interest – of around 8.10 per cent, while the expected pricing of Union Bank’s bonds is 8.65 per cent, the sources said.

In March, Union Bank’s board gave approval to use AT-1 and Tier-2 bonds to raise capital not exceeding Rs 4,300 crore within an overall capital-raising limit of Rs 8,100 crore.

Subsequently, in June, Canara Bank’s board approved plans to raise capital through Basel III compliant Additional Tier I bonds to the extent of Rs 5,500 crore in the current financial year.

Sources said that call options worth Rs 500 crore on some of Union Bank’s bonds were set to be exercised soon.

For AT-1 bonds, which are debt instruments without a maturity date, banks can use a call option that lets them redeem such securities after a specified duration. The appeal of AT-1 bonds comes from the fact that they typically fetch a higher return than many other fixed-income instruments.

Last week, Business Standard reported that State Bank of India and Canara Bank plan to soon raise a total of Rs 7,500 crore through the issuance of AT-1 bonds. Indian Overseas Bank is also likely to tap debt capital markets soon.

Sources said that State bank of India’s fund-raising plan, which is worth around Rs 3,000-Rs 3,500 crore, should materialise around the end of July or the first week of August.

According to treasury officials, banks could be making a beeline to raise debt at prevailing market levels as interest rates are soon likely to head higher.

After raising the repo rate by 90 basis points since May 4, the Reserve Bank of India is expected to tighten monetary policy again at its next review in early August in order to tackle high inflation.

Earlier this month, Punjab National Bank sold Additional Tier-I bonds worth Rs 2,000 crore at a rate of 8.75 per cent, lower than 9-9.25 per cent expected earlier. The issuance was the first for any state-owned bank in the current fiscal year.

Yields on triple-A rated three-year corporate bonds have climbed 143 basis points to 7.41 per cent since March 31, while those on 5-year bonds have risen 113 basis points to 7.56 per cent, Bloomberg data showed. Yields on 10-year corporate bonds have hardened 60 bps to 7.77 per cent, the data showed.

A large portion of corporate borrowing is conducted in bonds maturing in three to eight years.

Over the same period, yield on the 10-year government security has hardened 55 basis points. Government bond yields are the benchmarks for pricing corporate debt.