Summary of this article
AT-1 bonds are perpetual bonds raised by banks
Higher risk of AT-1 bonds could mean higher returns
Can retail investors invest in AT-1 bonds?
On November 28, Canara Bank raised Rs 3,500 crore through additional tier 1 (AT-1) bonds, with a coupon of 7.55 per cent, according to sources. This was the first issuance of AT-1 bonds in the current financial year.
The last time an Indian bank had raised funds through AT-1 bonds was by the State Bank of India in October 2024. SBI had raised Rs 5,000 crore through these bonds at a coupon of 7.98 per cent.
The lack of liquidity of AT-1 bonds and the associated higher risks of these capital instruments have led to lower issuances of these bonds in the market. The bond raise of Canara Bank was seen as a test for the market's appetite for these bonds. The coupon set at 7.55 per cent shows good investor demand for the bond, which in turn could result in more such players tapping the bond market, market participants said.
AT-1 Bonds
AT-1 bonds are a special debt instrument, or perpetual instruments, issued by banks to increase their capital base. These bonds do not have a fixed maturity. While their bonds must be Basel-III compliant, AT-1 bonds are considered among the riskiest bank capital instruments.
For the same purpose, AT-1 bonds offer one of the highest yields compared to other debt instruments, making them attractive for investors who understand the associated risks of buying these bonds. With no fixed date of maturity, the repayment of these bonds is highly sensitive to the bank’s capital and earnings. In case the bank faces financial trouble or risk thresholds are breached, interest repayments on these bonds can be held off. These capital instruments fall at the last of the repayment hierarchy. If the bank goes bankrupt, AT-1 bonds would likely be written off, like in the case of YES Bank when it was restructured.
For banks, raising funds through AT-1 bonds provides banks with the flexibility and acts as cover for their deposits, allowing them to expand their lending base. It also acts as a shock absorber for banks during tumultuous times.
For retail investors, investment in AT-1 bonds at the time of issuance is not allowed due to the higher risks associated with these bonds. AT-1 bonds are restricted to institutional investors who fully understand the risk associated and want to diversify their books to get higher returns. A retail investor can buy these bonds in the secondary market, but the lower liquidity of these bonds in the secondary market could make it difficult to reach an effective price point, as well as lower the accessibility for small investors to buy these debt instruments.
