City, Jamuna banks to issue Basel III compliant perpetual bonds

Sunbd Desk || Published: 2020-06-25 07:11:22 || Updated: 2020-06-25 07:11:22

Bangladesh Securities and Exchange Commission approved the two bonds worth Tk400 crore each on Tuesday.

The City Bank and Jamuna Bank will issue perpetual bonds and the proceeds of the bonds will be regarded as Additional Tier 1 capital of the issuers that will help the commercial banks fulfil their Basel III requirement.

The Bangladesh Securities and Exchange Commission (BSEC) approved the two bonds worth Tk400 crore each on Tuesday.

The unsecured bonds will be non-convertible and perpetual in nature and their units worth Tk10 lakh each will be offered to eligible investors through private placement, according to a BSEC press release.

Investors will enjoy 11-14 percent interest as coupon from the floating-rated bonds.

IDLC Investments will be the trustee of both the bonds, while City Bank Capital Resources will be the lead arranger.

A new product to fulfill Basel III requirements

Currently, the local bond market is dominated by redeemable subordinated bonds mainly issued by commercial banks, which help them construct their mandatory secondary capital base through the bond proceeds with a specific tenure.

The Bangladesh Bank is implementing Basel III in the local banking industry so that banks are adequately capitalised to avert a systematic risk.

Basel III is an international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector, by requiring banks to maintain proper leverage ratios and keep certain levels of reserve capital on hand.

The capital adequacy has two parts. First part is equity which is perpetual in nature and regarded as Tier 1 capital base. Second tier is capital formed through debt securities, which is repayable at maturity, but helps strengthen a bank for the time being.

Perpetual bonds are debt securities. But as these are issued with no specific maturity, banking regulators tend to treat those as a part of core capital, Additional Tier 1 capital to be particular.

In addition to a bank’s core capital or Tier 1, Additional Tier 1 may also use other additional forms of capital to ensure its capital adequacy.

The ongoing phase of Basel III implementation now requires most Bangladeshi banks to increase core capital’s share within the mandatory adequacy.

Bonus share issuance is facing a practical limit as issuers need to pay some additional tax if they fail to disburse cash dividends in an equal rate to stock dividends.

The two remaining options are issuing right shares or perpetual bonds and as right share is not popular enough in the current context of depressed capital market, perpetual bond is the best solution for banks to strengthen their capital base, according to industry experts.

In a recent webinar, the BSEC chairman has said nine perpetual bonds were waiting for the commission’s approval. The already approved two are among those, while the head of the securities regulator expressed his readiness to clear the rest seven this month.

City Bank Capital Resources, a top investment bank in the country, has been working hard to introduce and popularise the new instrument. It is serving as the lead arranger for a number of banks’ Basel III complying perpetual bonds.

Redemption possible after 10 years

While explaining the nature of the bond, an investment banker told The Business Standard, “Central bank guideline suggests that an issuer bank can recall its perpetual bond after 10 years if there emerges any allowable situation, of course, with the central bank’s prior approval.”

“But investors do not have right to redeem the bond units before those are called by the issuer,” he added.

In that case, secondary market is the way how an investor can take exit by selling bond units to other investors.

Liquidity concern

However, the two perpetual bonds are not going to be listed.

The respective issuers may offer liquidity to investors through enlisting the bonds in the local bourses’ alternative trading boards instead of main board that requires more cost of listing along with fulfilment of some additional criteria.

Trust Bank’s Managing Director Faruq Mainuddin Ahmed in a webinar on Saturday emphasised popularising secondary trading for bringing liquidity – ease of finding a buyer and seller – in perpetual bonds’ market.

Cost, fulfilment of conditions and the lead time are the reasons behind low popularity of bond listing in the local bourses, according to market experts.

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