Perpetual bonds may dying with few takers amid rising yields

MUMBAI: Perpetual bonds, a way of ensuring that banks have sufficient capital during times of stress, may be dying an early death in India. With few takers in the secondary market for such securities due to inadequate pricing and their hybrid nature, institutions that bought them are sitting on mark-to-market (M2M) losses, four people aware of the matter told ET.

So far, banks have sold Rs 13,500 crore of perpetual bonds, with rates offered in the range of 9.15-11%. Last February, Punjab National Bank raised Rs 1,500 crore offering 9.15%, the lowest rate in this space. AK Capital was the arranger and took the securities on its books. Later, it was said to have sold a sizable part of the holdings to a large private bank, according to the people familiar with the matter. Bought with the intent of trading, both are now stuck with their investments.

With yields of perpetual bonds having risen about 125 basis points over the past two months, prices have been pushed down, resulting in mark-to-market losses. Emails and text messages sent to AK Capital and other arrangers did not elicit any response till the time of going to the press.

“The risk-reward is perhaps not balanced for perpetual bonds,” said Piyush Wadhwa, head, trading at IDFC. “Investors are demanding higher rates due to risk factors. Now, there are few takers for perpetual bonds, where some arrangers may be sitting on losses. Issuers have to price them reasonably for issuances.”

There are also curbs on investments by PFs on perpetual bonds. They cannot invest in such bonds with a rating below AA. Their holdings of perpetual bonds cannot exceed 2% of their total portfolio and 20% of an issuance by a bank. Active arrangers for such bond sales include Trust Investment, AK Capital, Darashaw, ICICI Securities Primary Dealership and Axis Bank.