The Standard Bank Ltd will issue perpetual bond and the proceeds of the bond will be regarded as Additional Tier 1 capital of the issuer, which will help the commercial bank fulfill its Basel III requirement.
The Bangladesh Securities and Exchange Commission (BSEC) approved the bond worth Tk500 crore on Wednesday.
The unsecured bonds will be fully redeemable, non-convertible and coupon bearing perpetual in nature, and their units worth Tk1 crore 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 bond. The IDLC Investments will be the trustee of the bond, while IDLC Finance Ltd 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. The first part is equity that is perpetual in nature and regarded as Tier 1 capital base. The second tier is capital formed through debt securities, which is repayable at maturity, but helps to 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 at 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 a depressed capital market, perpetual bond is the best solution for banks to strengthen their capital base, according to industry experts.
However, the perpetual bond is not going to be listed.
The respective issuer may offer liquidity to investors through enlisting the bonds in the local bourses' alternative trading boards instead of the main board that requires more cost of listing along with fulfillment of some additional criteria.
Cost, fulfillment of conditions and the lead time are the reasons behind low popularity of bond listing in the local bourses, according to market experts.