Government-owned lender Andhra Bank, which had decided not to exercise a “call option” included in the terms of a perpetual bond issued by the bank, is rethinking its decision after pressure from investors.
On Friday, Andhra Bank informed exchanges that its board had decided not to exercise the “call option” coming due on Dec. 26, 2019. The bank did not provide any reason for the same. Concerns that this would disrupt the market for additional tier-1 bonds by public sector banks, however, appear to have led the bank to rethink its decision. In a subsequent exchange notification on Saturday evening, the bank said that the board will now consider redeeming these bonds.
To be sure, as per the terms of the perpetual bond issue, the decision to exercise the call option is at the discretion of the bank. However, until now, most banks have exercised the option at the end of five years to allow investors an option to exit.
Andhra Bank's decision to go against the norm led rating agency ICRA to sound a note of caution.
“Non exercising of call option on AT-1 bonds is likely to widen the spread for these bonds as investors have typically assumed this as a five-year maturity paper,” ICRA said in a statement on Saturday morning. “These bonds are currently valued with an assumption that the call option will be exercised by the issuer and hence with this event, the valuation methodology for such bonds needs to be reviewed.”
The rating agency, however, clarified that this would not be treated as a default as the deferment of call option is according to the terms of the bond issue.
Andhra Bank is currently in the midst of a three-way merger with Union Bank of India and Corporation Bank.
This story has been updated after Andhra Bank issued a revised notice with stock exchanges on Saturday evening.
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