The ADB broke new ground last week when it became the first foreign issuer to tap India's domestic bond market. The triple-A rated credit priced a Rp5 billion ($110 million) transaction via the HSBCI and ICICI. The 10-year bullet deal was priced at par with a coupon of 5.4% to yield 17bp over the government yield curve. Here assistant treasurer, Juan Limandibrata, explains the rationale for the issue and the supranational's funding strategy for 2004.
How did this deal come about?
Limandibrata: It's been in process for quite some time. We started discussions with the Indian government back in 2002, but it's been well worth all the hard work we've put in since then. We're extremely happy with the result and the procedures we've set up in terms of regulatory requirements, disclosure, documentation, clearing and settlement etc etc. We've established a good framework for other foreign issuers to tap the market.
This is the first time a non-resident issuer has tapped the Indian rupee market and it marks a new milestone for us as well. We've never launched a deal in one of our borrower countries before. We've previously done deals in Hong Kong, Taiwan and Korea, but none of them are considered borrower countries. That's the genesis of this transaction - India is one of our biggest borrowers and proceeds are being used to fund three projects we approved last year for a power transmission line, healthcare project and housing finance project.
You picked a 10-year maturity. Is that part of the domestic bond curve quite liquid?
Yes, 10-years is probably the most liquid part of the curve. There's about Rp150 billion bonds outstanding and the bid/offer spread is only 1bp.
What's the pricing rationale? You're obviously a triple-A rated credit and India is double-B rated by S&P. Why have you priced at a premium?
As far as domestic investors are concerned, their government is the highest credit in India and its bond curve is far more liquid. You also have to consider that government bonds are zero risk weighted, whereas ours carry a 20% risk weighting. Government bonds are eligible for reserve purposes. Ours are not. The one thing we do share in common is that both our bonds are witholding tax exempt.
If that's the case, are there any proxy sovereign issuers that make a better comparable?
There's the so called oil bonds. These are basically issued by the Indian government and carry a zero risk weighting, but aren't eligible for reserve purposes. When we started marketing our issue, we went out with a price range at a zero to 20bp premium to the sovereign curve. We priced at a 17bp premium and at that time, the oil bonds were trading at 25bp over the sovereign curve, so we priced about 8bp through.
What did the order book look like?
We roadshowed the bond in Mumbai, New Delhi and Calcutta and attracted an order book of Rp2 billion, so basically we finished two times covered. We had a total of 20 investors, with a split that saw 60% placed with banks, 21% with insurance companies and 19% with mutual funds.
You say proceeds were on-lent to projects in India. Was it cheaper to access the domestic market than it would have been to simply fund in dollars and swap into rupees?
It's hard to make a comparison. In this instance, the borrower decided to price the loan on the basis of the bond issue rather than use a cross-currency swap. But we're doing another loan where a cross currency swap is involved, so we provide both alternatives. The main problem using cross-currency swaps is exposure to basis risk.
The Indian government only allows swaps to be exercised at the time of loan disbursements. But all our loans are project based and the drawdown could be over an extended time period. Therefore, while we might get a good swap rate for the first disbursement, the market might have turned against us by the time of the second.
Will you come back to the Indian bond again?
If demand requires it we'll be back. At the moment, the amount we've raised is enough to cover the three loans we approved last year. But it's likely we may approve another loan for about $100 million equivalent this year and that would provide us an opportunity to return.
How much is your overall funding programme in 2004?
We're forecasting about $3.5 billion. This is somewhat lower than recent years, but our liquidity situation is quite high because we received some one-off pre-payments at the end of last year and beginning of this year. During 2003, for example, we raised about $4 billion and $6 billion in 2002. Next year we should be back to about $5 billion again.
And what's your issuance strategy?
We'll continue in much the same vein as last year. We plan to do one benchmark dollar issue for $1 billion, but the possible maturity range is quite wide and could span anything from three to 10 years. The rest will come from the structured market.
We always want to achieve the tightest spread possible referenced against our credit quality and funding strategy. We were very happy with what we achieved last year. We did a $1 billion three-year deal in January 2003, which was the tightest ever. It priced right at the top of the triple-A curve. (Editor's note: issue price of 99.605%, coupon of 2.375% to yield 70bp over Treasuries or 22bp through Libor).
Do you plan to tap other domestic currency markets?
Yes. The ADB's strategy is to tap the domestic markets of our developing member countries and especially those countries where market development is already quite high and we have suitable projects to fund. On that basis, we're preparing for possible issues in Thailand and China. We submitted our request late last year and are currently awaiting each government's response.
