Is it true that SBI is issuing ATR-1 bonds to investors? Will there be an appetite after the experience of Yes Bank where ATR bond holders lost all their money?

It may be recollected that ATR-1 bonds are special perpetual bonds that BIS allowed banks to issue and this could be used to enhance the Tier-1 capital as it was treated as quasi equity. However, in a crisis situation, banks could repudiate such bonds.

The first case of ATR-1 bonds default was seen in the case of Yes bank. It had Rs.8000 crore of ATR-1 bonds outstanding and when it was taken over by SBI, a decision was taken by the RBI that these bonds would be written off, leaving the bond holders high and dry.

It is in this context that SBI pricing its ATR-1 bonds at record low coupons comes as a surprise. SBI will sell Rs.4000 crore of Additional Tier 1 bonds at a coupon of 7.74%. That’s the lowest pricing for the kind of debt, which can be fully written down in a crisis.

Stimulus from the RBI and the government reduced average borrowing costs in a big way to the lowest levels in last 10 years. Also, with SBI being TBTF bank, investors are confident that capital ratios will be adequately beefed up.

The pricing is also a little surprising because macro risks are at an all time high due to the dual impact of bank stress and weak consumer demand. That makes the risks of AT1 bonds more real.

The AT1 bond offering by SBI is rated AA+ and it can be called back either after five years or any year thereafter.