ICICI, India's largest private sector bank, completed the first 10-year bond from a domestic banking institution in nearly two years on Monday with a $700 million transaction that pushed pricing to its limits.
Nevertheless, fixed-income analysts expect the Reg S/144a deal to trade in during secondary market trading on Tuesday thanks to a scarcity of paper, not only from India but also from investment grade institutions offering yields above 4% at the 10-year point of the curve.
Bankers said Baa3/BBB- rated ICICI attracted a peak order book roughly 2.5 times covered before pricing was narrowed from 230bp over Treasuries to final pricing at 210bp over and a final order book of $1.6 billion. This issue price was fixed at 99.592% on a coupon of 4% to yield 4.05%.
Syndicate bankers were reluctant to pin down a fair value estimate on the grounds that investors had different views on the subject given a lack of close benchmarks. However they did conclude that the new issue premium was "slim".
Bankers also said ICICI decided to issue in 144a format to draw in a wider pool of investors given Middle Eastern funds have scaled back their investments and do not tend to like maturities beyond seven-years.
As a result, US investors took the second biggest chunk of paper on 33% behind Asia's 52%. By contrast, ICICI's last deal in August 2015, saw US investors come third on 12% behind Europe and the Middle East on 42% and Asia 43%.
In total 140 accounts participated with 42% allocated to fund managers, 19% to insurers, 19% to central banks and sovereign wealth funds, 16% to banks and 4% to other.
In a sales note published before the deal priced, Mizuho analyst Mark Reade calculated fair value at 220bp over Treasuries. "The complete absence of Indian bank US dollar-denominated 10-year paper (and the illiquidity of the bonds that do exist) makes an assessment of this deal's fair value no easy task," he wrote.
He based his view on NTPC's recent 2026 deal, which is trading 55bp wide of its outstanding 2021 paper. However, Reade added that ICICI’s new issue could well tighten in to 205bp over Treasuries given a shortage of investment grade bonds yielding more than 4% and a general lack of paper from Indian credits.
Standing in ICICI’s favour is its safe haven status within the Indian banking universe alongside State Bank of India and India Exim Bank. All three banks have seen their outstanding bonds drop only one point since Standard & Poor's placed three other Indian banks on negative outlook in mid-February citing rising NPLs and inadequate capital.
As a result, BBB- rated Bank of India and Syndicate Bank are both now in danger of dropping into high yield territory, joining Indian Overseas Bank, which is rated BB+ and was also placed on negative outlook at the same time. The three saw their outstanding dollar bonds drop two to three points following the move and have stayed at that level since then.
ICICI's existing $1 billion 5.75% November 2020 bond dropped from about 112.65% to 111% according to S&P Global Market Intelligence. On Monday it was trading on a G-spread around the 165bp level.
Its $500 million 3.125% August 2020 bond has also been fairly stable, dropping one point since mid-February and generally trading around its issue price since it was completed last August.
The new deal's other two comparables comprise State Bank of India's $500 million 4.875% April 2024 bond and India Exim's 4% January 2023 bond. The former was trading on a G-spread of about 190bp and a bid yield of about 3.86% on Monday, while the latter was yielding about 3.57% according to one broker.
Syndicate bankers said investors liked ICICI’s deal because the bank has not been affected by the government's recent budget wheni it decided not to increase a Rs250 billion capital injection into the public sector banks. In a recent report, S&P said it believes "Indian public sector banks will find it difficult to meet the 7.625% Tier 1 equity ratio (including capital conservation buffer) by March 2016."
It estimates they will need Rs2.3 trillion by 2019.
By contrast, ICICI reported a Tier 1 ratio of 12.76% at the end of 2015 according to its online roadshow. It said this is likely to decline by 50bp based on the new March 2016 regulations.
The Reserve Bank of India has been forcing Indian banks to re-classify all restructured loans as non-performing. The move prompted a huge spike in Bank of India's NPLs from 5.39% in March to 9.18% at the end of December, the highest jump in the sector.
Analysts say ICICI is likely to weather the NPL cycle better than nearly all of its peers, with net NPLs rising from 1.4% in Financial Year 2015 to 2.03% at the end of the first nine months of 2016. Only Axis Bank has a better radio on 1.68%.
ICICI’s earnings have also been on an improving trend over the past couple of years thanks to better cost of funds management. As S&P concluded, ICICI’s “sound earnings and capital will help it to weather a deterioration in asset quality over the next 18-24 months”.
Joint global co-ordinators for its latest bond deal were: Bank of America Merrill Lynch, Barclays, Citi, Credit Agricole, HSBC and MUFG.
This article has been updated since first publication with final deal stats.
