Bank of India, acting through its London branch, priced a $750 million dual-tranche bond early yesterday morning. The deal comprised a $250 million tap of its September 2015 bonds, first issued in March last year, and a new $500 million 10-year bond.
Bank of India is the second Indian bank to issue a senior 10-year US dollar bond, following ICICI Bank's debut $1 billion deal in November last year. And it is the first Indian bank to do so in the Reg-S format
Barclays Capital, Deutsche Bank, HSBC, Royal Bank of Scotland and Standard Chartered were the arrangers.
The new 10-year bond priced at a spread of Treasuries plus 260bp to yield 6.305%, while the tap priced at Treasuries plus 235bp to yield 4.705%. This was at the tight end of the final guidance of Treasuries plus 260bp to 265bp and Treasuries plus 235bp to 240bp respectively; and about 10bp and 5bp inside the initial guidance.
The bonds initially traded up, but then widened in a soft market. The September 2015s widened to Treasuries plus 232bp/230bp from Treasuries plus 227bp/225bp yesterday morning, while the new January 2021s were initially quoted at Treasuries plus 255bp/253bp and subsequently widened to 263bp/260bp.
The coupon on the 10-year bond was fixed at 6.25% and the notes were reoffered at 99.597, while the coupon for the tap was unchanged from the earlier deal at 4.75%. The 2015 notes were reoffered at 100.18.
When the September 2015 notes were first issued almost a year ago, they were priced to yield 4.876%, which corresponded to a spread of 235bp over the equivalent five-year Treasury. In other words, the spread was identical to where the tap priced yesterday. The $250 million tap will bring the total size of this bond to $750 million. The bookrunners on the new deal were the same as on the first 2015 issue, except for Citi which was replaced by Standard Chartered.
However, investors preferred the 10-year tranche due to the higher yield. Since the beginning of February, the 10-year US Treasury yield has risen some 30bp to 3.705% on Wednesday, and the bonds were priced off that higher level.
The 10-year tranche gathered an order book of $1.9 billion from 185 investors, while the tap received $1 billion of demand from 103 investors.
The deal drew participation from commercial banks across Asia and Europe. According to a banker on the deal, banks bought the bonds for their Treasury units and also for asset swapping (converting the bonds from fixed-rate to floating-rate instruments) to match their liabilities.
Fund managers were allocated 41% of the 10-year tranche, while commercial banks bought 32%, private banks 15% and insurance companies 12%. Of the tap, 56% went to fund managers, 28% to commercial banks, 14% to private banks and 2% to insurance companies. By geography, Asia took 66% of the 10-year bond, Europe 28% and offshore US 6%. The tap was split 77% to Asia and 23% to Europe.
The issue is rated Baa2 (stable) by Moody’s and one notch lower at BBB- (stable) by Standard & Poor's. There is event of default if the government of India ceases to own more than 50% of the voting securities. It currently owns 64.5% of the bank.
As Bank of India is a quasi-sovereign name, its comparables include other public sector banks such State Bank of India, Bank of Baroda and Export-Import Bank of India. These three banks are all somewhat similarly rated and have outstanding bonds due in 2015. They traded at Treasuries plus 209bp, 245bp and 230bp respectively on Wednesday afternoon.
Bank of India’s outstanding September 2015 bonds were not viewed as a very reliable reference point as they were technically tighter on a spread basis than they should be because traders were short of the bonds and wanted to cover their positions, according to one banker. On Wednesday afternoon, ahead of the pricing of the new paper, they were quoted at a wide bid-offer spread of Treasuries plus 235bp/215bp with hardly any bonds changing hands.
Other reference points included the ICICI Bank 2016s and 2020s, which were bid at Treasuries plus 250bp and 257bp respectively. The 25bp pick up between Bank of India’s tap and the 10-year bonds looked attractive compared to ICICI Bank. However, the two are not exact comparables despite similar ratings, as ICICI Bank is a private sector bank and its bonds were issued in the Reg-S/144A format.
After Bank of India’s successful issuance of a 10-year US dollar senior bond, William Mak, an analyst at Nomura, cautions investors that other Indian banks may follow suit with 10-year bonds, rather than the five-year bonds that they have traditionally issued in the past.
However, one banker noted that most Indian banks are raising US dollars to fund their offshore loan growth and most of their assets have tenors of three to five years. As the cost of funding for a 10-year bond is higher, he reckons most banks will prefer to tap the market with a five-year bond and return again after that.
A wave of Indian bank issuance is waiting to be unleashed. Next in line is Bank of Baroda, which has mandated Barclays Capital, Citi, HSBC, J.P. Morgan and Standard Chartered to organise a series of fixed-income investor update meetings in Singapore, Hong Kong and London, starting on February 14.
