Markets

How perpetual bonds pinch investors

MUMBAI: The recall of perpetual bonds by financially crippled banks may have been a blessing for investors who would have had to bear losses if the banks had stopped paying interest. But the recall has also left some wealthy individuals, trusts and mutual funds taking a hit on their future income stream as they expected high payouts for a long term.

“Many investors including wealthy people, trusts, mutual funds were lured to high-yielding perpetual bonds,” said Vikram Dalal, managing director, Synergee Capital. “They bought those papers from the secondary market at a premium, as high as 7-8 %. With sudden withdrawal of schemes, investors are all incurring losses.”

“They will also lose out higher interest income they had expected over a long of time,” he said.

About six state-owned banks, including IDBI Bank, Bank of Maharastra, Dena Bank, Uco Bank and Corporation Bank and United Bank of India, have collectively withdrawn Rs 13,000-14,000 crore worth of perpetual bonds in the past one month.

These bonds have been allowed to extinguish at par with face value that is Rs 10 lakh per bond, dealers said. So, an investor who bought the paper paying a premium in the secondary market will incur huge losses.

ET had reported on February 8 that the Reserve Bank of India had directed about a dozen state-run banks, put under the regulatory watch for mounting bad loans, to retire high-cost debt such as Additional Tier I capital as part of the austerity drive that seeks to restore commercial viability for the stressed lenders.

Additional Tier I, or perpetual bonds, are a quasi-debt instrument with no fix maturity. Normally, these papers have five-year call option, an exit route that allows issuers to call back issuances.

But this time, banks have called back issuances well before the five-year period availing special regulatory dispensation.

“Perpetual bonds have fallen off investors’ radar for now," said Ajay Manglunia, executive vice president at Edelweiss Finance. "With weak state-owned banks calling off bonds well before the scheduled date, investors will incur losses if they bought it at a premium from the secondary market."

“There were cases of alleged miss-selling as well," he said.

As many as 11 banks, including Bank of India and IDBI Bank, are placed under the RBI's prompt corrective action (PCA) in view of a precipitate decline on certain performance parameters such as net non-performing assets (NPAs), low capital level, and negative return on assets for two years.

According to market estimates, banks have sold perpetual bonds worth Rs 87,195 crore in 78 such sales, offering interest in the range of 8.15-12%. About four-fifths of the total issuances offer 9% or more, while the current 10-year yield is hovering around 7.47-7.50%.

Original Article

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