IBBL and SJIBL set debut trading dates for their perpetual bonds

Islami Bank Bangladesh Ltd (IBBL) and Shahjalal Islami Bank Ltd (SJIBL) have announced the debut dates for the trading of each of their perpetual bonds at the Dhaka Stock Exchange (DSE).

Of the two bonds, IBBL 2nd Perpetual Mudaraba Bond will commence at DSE from 23 December, and SJIBL Mudaraba Perpetual Bond from 26 December.

Shahjalal Islami Bank raised Tk500 crore and Islami Bank Tk800 crore through issuing perpetual bonds to strengthen their additional Tier-I capital.

The very first perpetual bond at the DSE was issued by Islami Bank back in 2007, and the bond was named IBBL Mudaraba Perpetual Bond.

Then the second perpetual bond was introduced by Al-Arafah Islami Bank after a hiatus of 14 years.

At present, the perpetual bonds are gaining momentum in Bangladesh as a large number of commercial banks are on their way to strengthening the Tier-I capital base to comply with Basel III guidelines.

Perpetual bonds have no maturity date and they pay interest to investors in the form of coupon payments, just as with most bonds, but the bonds' principal amount does not come with a set date for redemption (repayment).

Tier-I capital consists of equity and perpetual debt securities, which are deemed to be similar to equity in nature.

Market insiders said the issuer has several advantages to raise capital through issuing perpetual bonds because, unlike Tier-II subordinated bonds, perpetual bonds have only a one-time flotation cost, cheaper than common stock, and have a call option where the issuer has the right to retire the bond and issue a less costly bond.

But a controversial issue was raised by the securities regulator's direction that seven commercial banks have to pay interest on the perpetual bonds every year regardless of their financial situation.

The central bank's 2014 guideline on Risk-Based Capital Adequacy stated: "A bank must have full discretion at all times to cancel distributions or payments to the bondholders" to make the perpetual bond proceeds qualify as additional Tier-I capital, which is crucial for complying with the Basel III accord.

An investment banker said, the two bonds, which are going to be traded on the DSE, are out of this unusual situation. But for the seven banks, the securities regulator should change their direction.

Last year, the Bangladesh Securities and Exchange Commission (BSEC) decided that banks should raise capital at 10% of perpetual bonds through an initial public offering.

Then the BSEC and the Bangladesh Bank decided that perpetual bonds issued by banks must be listed on the stock exchanges within 30 days of their subscription closure.