perpetual bonds are also known as Additional Tier 1 Bonds. AT1 bonds are issued by Banks & NBFCs that do not have any specified maturity date. Banks issue AT1 bonds to meet their capital adequacy requirement in case of financial crisis. They can be redeemed by issuers, usually after five years or ten years by exercising the call option. The issuer may call or redeem the bonds if they can refinance the issue at a cheaper rate, especially when interest rates are declining. They also have the option to keep paying you interest or skip and extend the tenure of bond.

issuers can skip paying interest or principal if the capital adequacy ratio falls below a certain threshold to protect themselves from any systemic risk. Issuers try to keep their capital adequacy ratio above this regulatory limit. Some of the major issuers in India are State Bank of India, Bank of Baroda, Punjab National Bank, HDFC Bank, HDFC Limited.

The perpetual bonds carry credit risk, interest rate risk and liquidity risk.

  • Credit Risk: The issuer has the option to write off the principal in times of severe financial crisis.
  • Interest Rate Risk: Investor may earn less interest when rates are rising. You could have invested that principal in higher-yielding instruments.
  • Liquidity Risk: There is no surety that you will get your principal back on the call date as the bank may choose to extend the tenure of bonds at a future date. You have the option of selling these bonds in the secondary market.

The perpetual bond market is mostly active with trades in large and higher rated issuances. Most trades in perpetual bonds takes place on a yield-to-call basis. Yield to call is the cost that will be paid by the issuer if bonds are redeemed before option / maturity date. This is based on the market convention that the issuer will exercise the call option on the due date. “Perpetual bond market sees active participation from banks, corporates, mutual funds and High net worth individual investors.

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