AT-1 bonds: AMFI issues NAV calculation norms

Our Bureau Mumbai | Updated on March 25, 2021

Even if one bond of an issuer trades, other bonds of same issuer can be considered as traded for calculating YTM

The Association of Mutual Funds in India has issued the guidelines for the valuation of perpetual bonds issued by banks. Debt funds will have to follow these norms from April 1.

Earlier, the Securities and Exchange Board of India had eased the valuation norms on additional tier-I and tier-II bonds and had directed AMFI to issue guidelines. SEBI had amended its earlier regulations by giving MFs twoyears to fix the tenure of perpetual bonds at 100 years. A longer tenure increases the risk on these bonds which pushes up the yields that would lead to a sharp fall in the net asset value of debt schemes.

In order to avoid the dislocation of market and following the Finance Ministry’s intervention, SEBI allowed debt schemes holding perpetual bonds to value them as ten-year papers for now.

Each bond issued by a company is identified by an ISIN code. As per AMFI guidelines, even if one ISIN of the bond issuer is traded, all other ISINs will be considered as traded.

ISIN will be key for NAV

The valuation of these ISINs, though, will differ from the traded security, as it has to account for the yield-to-maturity spreads.

As per the new SEBI norms, all perpetual bonds need to be valued at yield-to-maturity (YTM) against the earlier practice of yield-to-call date, when the company is expected to buy back the bond and return money at a specified interval. In case, none of the securities of the bank are traded, MFs can refer to traded price of securities issued by a similar bank with similar maturities, said AMFI. Past trades can be referred to, if there are no trades even in similar securities, it added . For benchmark ISINs, past trades up to last 15 days can be referred to while for non-benchmark ones, trades up to 30 days can be referred. Starting from October, the number of days will be shortened to seven days for benchmark securities and 15 days for non-benchmarks, it said.

Valuation agencies will decide on the two groups of ISINs — benchmarked and non-benchmarked — after consultation with the industry.

At present, SBI securities are used as a benchmark across all maturities for perpetual bonds valuation. If the AT-1 bond issuer does not exercise the call option, all securities issued by that issuer will have to be valued as 100-year papers, said AMFI.

MFs will start disclosing yield-to-call and yield-to-maturity of the bond security from April 1. This will give investors an understanding of how the bonds are priced in markets.

Published on March 25, 2021

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