Indian Oil Corporation (IOC) early Friday morning completed the sale of its first international bond, following a three-day roadshow through Singapore, Hong Kong and London. Arrangers for the $500 million Reg-S issue were Deutsche Bank, HSBC and Standard Chartered, which secured a total order book of $6.5 billion from 275 investor accounts.
The issue pays a coupon of 4.75% and was re-offered at 99.692 to yield 4.82% to a maturity date of January 22, 2015. The price equalled a spread of 205bp over mid-swaps, or 233bp over the yield of the five-year benchmark US Treasury.
Written into the term sheet was an event of default (EOD) clause, which will be triggered if the Indian government's ownership of IOC was to fall below 50%. The government currently owns 78.92%. One source close to the deal explained that this was merely in place to protect investors. Effectively, the EOD allows the bond holders to sell the bonds back to the issuer if there is a significant change of ownership of the company.
Typically, under a change of control, investors have the right to sell at par. However, one banker noted that "if the bonds are trading higher, a put option at par will lose five to 10 points on the notional price", making it an unattractive proposition for potential investors. The EOD is designed to counteract such a scenario.
The IOC bond was being compared to other Indian quasi-sovereigns, such as NTPC's $300 million bond issued in February 2006 and maturing in 2016, and the State Bank of India's (SBI) $750 million 15-year deal issued in October last year. At the time IOC issued initial guidance, SBI was trading at a spread of 170bp-175bp, while NTPC was quoted at Treasuries plus 260bp-240bp.
About 50% of the deal was allocated to Asian accounts, Europe bought 35% and offshore US investors took 15%. Fund managers were sold 49% and banks received 21%. Private banks and retail, which was believed to be made up predominantly of non-resident Indians, took 19%. Central banks were allocated 7% and insurance houses 4%.
Initially there was not a strong response from the market, however banks working on the deal were pleasantly surprised with the quality of investors that came into the offering close to the time of pricing. One source attributed this to IOC's dominance in the domestic energy market as well as the overall growth of the Indian oil sector. As another source said: "IOC has now established itself as a very solid borrower and they will have a faithful following for any future transaction. Their next deal will be priced off their own credit so it will be a far more transparent exercise."
Sources say the bonds fared well on their first day of trading. At the close of Asian business Friday, they were quoted at 100.85 to yield 4.557%, which was equivalent to a spread of 210bp/205bp over five-year Treasuries.
"The strong performance in the secondary market can partly be attributed to the enormous order book we generated and to the scarcity value (due to this being) an Indian corporate and not a financial institution," said one source close to the deal. "With an order book that was 13 times subscribed it is obvious that not a single account got the number of bonds they were after and, as a result, accounts looked to top up their allocations in the aftermarket."
IOC is India's largest domestic oil refinery with a combined refining capacity of 60.2 million metric tonnes per annum. It accounts for approximately 48% of the domestic petroleum products market, 34% of the national refining capacity, and 71% of the downstream pipeline capacity in India.
Moody's rated the bond issue Baa3, Standard and Poor's gave it a BB+, while Fitch rated it BBB-. Moody's rating reflected IOC's "leading position in the domestic oil refining and marketing sector, adequate financial profile, improved liquidity position, and strong support from the Indian government".
The Asian bond markets are in for another busy week with Vietnam expected to price its $1 billion 10-year bond by the end of the week and PT Cikarang Listrindo set to issue a five-year bond in the coming days. Evergrande Real Estate will end its seven-day roadshow on January 21.
