Oriental Bank of Commerce Perpetual Bond Issue Flops

Oriental Bank of Commerce (OBC) failed to drum up enough demand for its proposed Rs 1,000 crore Additional Tier-1 (AT-1) bond issue, as the Cabinet’s in-principle nod to public sector bank mergers brought with it uncertainty on the sector and the fate of individual lenders.

The Gurugram-headquartered bank invited bids for a Rs 500 crore AT-1 bond on Wednesday, which included the option to raise another Rs 500 crore through a so-called ‘greenshoe’. Despite extending the bidding time on the National Stock Exchange’s electronic platform by 30 minutes, the bank only received bids worth Rs 305 crore, Bloomberg reported.

With the bids ranging between 11.4-15.0 percent, the bank decided to pull the bond off the shelf.

A phone call to OBC’s managing director and chief executive officer Mukesh Kumar Jain was not immediately answered.

A major reason for the lack of demand was the Union Cabinet’s in-principle approval for the merger of state-owned banks, said Ajay Manglunia, executive vice president and head – fixed income markets at Edelweiss Securities Ltd.

Isn’t The Government Backstopping PSU Bank Bond Issuances?

Ironically, the failure of the OBC AT-1 bond issues comes soon after the government stepped in to prevent IDBI Bank from skipping a coupon payment. AT-1 bonds are instruments that have a loss-absorbing feature to them. This means that if a bank’s capital adequacy falls below a certain level, it needs to skip a coupon payment till those capital thresholds are achieved once again. It’s because of such features that investors seek a higher coupon rate on AT-1 bonds.

“This month’s capital injection into IDBI Bank suggests the Indian government remains unwilling to allow state banks to miss coupon payments on Additional Tier 1 (AT-1) instruments,” Fitch Ratings said in a release on August 16. Investors in AT-1 instruments are clear beneficiaries of capital injections and other forms of forbearance, the rating agency added.

The implicit government backstop for AT-1 issues from public sector banks, however, does not appear to have appeased all investors.

The perception on AT-1 bonds has changed over the past four-five months and there is now a clear differentiation between issuances by private sector banks, large PSU banks and the weaker banks, said a head of fixed income at a domestic asset management company on condition of anonymity.

Till February, the perception was that issuances by all public sector banks would be perfectly secure because of the government’s backing. This, the person quoted above said, was a mistaken hypothesis, because infused capital cannot be used to pay a coupon. Instead, the bank must make use of retained profits or statutory reserves.

Going forward, with most of the smaller banks making consistent losses, a complete erosion of capital reserves cannot be ruled out, said this person while pointing out that the yield differential between good banks and weaker banks has widened over the past few months.

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