SBI likely to issue perpetual bonds to end this year’s borrowings, Let’s know what are perpetual bonds

State Bank of India (SBI), the largest lender in the country, is reportedly preparing for its last bond issuance of the current financial year. The issuance is expected to be in the form of Basel III-compliant additional Tier I perpetual bonds. This move aims to raise approximately Rs 4,000 to 5,000 crore ($480 – $600 million), according to reliable sources familiar with the matter.
Fundraising Strategy:
SBI is likely to open bids for the issuance within the next two weeks, with the objective of matching or surpassing the outgoing amount from previous call options exercised in the fiscal year. The call options for bonds worth Rs 6,066 crores were exercised in December, and an additional Rs 1,251 crore is due in March. The lender had previously raised Rs 3,101 crore through perpetual bonds in July at a coupon of 8.10%, at a time when the benchmark 10-year bond yield was around 7.15%.
Market Dynamics:
Merchant bankers anticipate that SBI may need to offer a higher coupon this time due to the larger quantum it aims to raise. The bank has completed its fundraising via Tier II and infrastructure bonds for the current financial year.
Fundraising History in FY24:
- April: Dollar bond, 5 yrs, 4.8750% coupon, $750 million
- July: Additional tier I perpetual, 8.1% coupon, Rs 31.01 billion (10-yr call)
- July: Infrastructure, 15 yrs, 7.54% coupon, Rs 100 billion
- September: Infrastructure, 15 yrs, 7.49% coupon, Rs 100 billion
- November: Tier II, 15 yrs, 7.81% coupon, Rs 100 billion (10-yr call)
Delayed Dollar Bond Plans:
SBI has postponed its plans for a dollar bond issue, citing expectations of a decline in U.S. yields. The bank believes this would be a more favorable period for raising funds through dollar bonds.
Other Recent Financial Movements:
On Wednesday, SBI announced the successful raising of $1 billion through a syndicated social loan. Additionally, the bank is considering raising funds via green bonds in the next financial year, with discussions at an early stage.
What are perpetual bonds?
Perpetual bonds, also known as perpetual securities or perpetuals, are a type of bond with no maturity date. Unlike traditional bonds that have a fixed maturity period, perpetual bonds do not have a specific date on which the principal amount must be repaid. Instead, they pay periodic interest indefinitely.
Key features of perpetual bonds include:
- No Maturity Date: Perpetual bonds have no fixed maturity date, which means they do not have a specified time when the principal amount must be repaid to the bondholder.
- Coupon Payments: Issuers of perpetual bonds make periodic interest payments to bondholders. These payments, often referred to as coupons, are made at a fixed or floating rate.
- Callable or Non-callable: Some perpetual bonds may have a call option, allowing the issuer to redeem the bonds at a predetermined price after a certain period. However, not all perpetual bonds have this feature.
- Higher Yield: Since perpetual bonds lack a maturity date, they are considered riskier than bonds with fixed maturities. To compensate for this risk, perpetual bonds typically offer higher yields than traditional bonds.
- Investor Risk: Investors in perpetual bonds face the risk of interest rates impacting the present value of future coupon payments. If interest rates rise, the value of perpetual bonds in the secondary market may decline.
- Infinite Duration: Perpetual bonds theoretically have an infinite duration, as there is no contractual obligation for the issuer to repay the principal.
These bonds are commonly issued by governments, financial institutions, and corporations as a means of raising long-term capital without the need for repayment. Perpetual bonds can provide issuers with financial flexibility, and for investors seeking stable income, they offer a steady stream of interest payments. However, the lack of a maturity date means that the principal amount is not guaranteed to be repaid, and investors should carefully consider the associated risks.