State Bank of India’s (SBI) decision to widen its investor base and tap into alternative sources of liquidity showed brave, if not perverse, timing. The capital markets in Europe reacted negatively to the Ireland debt bailout, with stock prices falling and bond yields of riskier countries and companies rising. The cost of insuring both sovereign and corporate debt jumped at the beginning of the week.
Yet, SBI, India’s biggest commercial bank, priced a €750 million ($951 million) five-year senior bond issue on Monday evening, London time, after a three-day roadshow last week that included visits to investors in 10 European countries.
The deal was the largest ever Regulation-S bond (which excludes onshore US investors) transaction by an Indian entity, and one of the biggest euro-denominated issues by an Asian (ex-Japan) financial institution. The proceeds will be used by SBI for general corporate purposes.
"The euro currency market represents a natural next step for SBI in raising benchmark-sized financings, following their previous successful US dollar issues," said Paul Au, managing director of global capital markets and head of syndicate at UBS, one of the lead managers of the deal.
The senior notes, which were launched through SBI’s London office, pay a 4.5% annual coupon and were reoffered at 99.558 to yield 4.601% to a maturity date of November 15, 2015. They were priced at a spread of 230bp over the five-year mid-swap level, which was the equivalent of 283.2bp over the yield of the benchmark German government bond (bund).
Formal price guidance was released on Monday at midday in London at 235bp over mid-swaps, and priced a few hours later at 230bp. An existing issue, the SBI 4.5% 2015, was trading at mid-swaps plus 205bp, so the final spread came with a 25bp concession.
Some bankers pointed out that SBI paid a high price to find new investor and liquidity sources.
Outstanding US dollar issues with four- and five-year tenors were trading at spreads of 210bp and 200bp respectively, and the euro-dollar basis swap added a further 20bp to 25bp premium. In other words, by issuing in euros, SBI paid the equivalent of 250bp to 260bp in US dollars. Perhaps, it would have made more commercial sense to launch a US dollar deal and swap the proceeds into euros, they said.
But, for investors, the deal offered good value. In trading yesterday, the bonds were bid at the re-offer spread over bunds.
“The issue was generously priced at about 25bp over where the 2014- and 2015-dated SBI US dollar deals trade; and after taking into account the basis swap difference, the relative spread translates into about 50bp to 60bp,” said William Mak, a credit desk analyst for Asian financials at Nomura.
But, he added: “It makes sense for SBI to look for alternative funding sources in order to finance its expansion in Europe, and while it has become more difficult to raise funding in the domestic market due to the temporarily tightened liquidity condition.”
SBI launched its debut SEC-registered US dollar deal -- a $1 billion five-year issue -- only in July. And, earlier this month, the Reserve Bank of India hiked its short-term lending rate for the sixth consecutive time this year. The latest 25bp increase brought the benchmark repo rate to 6.25%.
SBI spread its fees liberally and made sure that all investors were covered by mandating as many as six joint lead managers for the deal: Barclays Capital, BNP Paribas, Credit Agricole CIB, Deutsche Bank, Standard Chartered and UBS.
They received orders worth €1.3 billion from around 160 accounts.
The bonds were distributed widely throughout Europe: 23.6% were placed in Germany, 20.7% in the UK, 15.3% in France, 11.4% in the Netherlands, 10.9% in Switzerland and 11.5% was sold across other countries across the continent. The remaining 6.7% was placed in Asia.
By investor-type, more than half the deal (55.7%) was allocated to asset managers, while 35.6% was bought by banks, 2% by insurance companies and 6.7% by others.
The notes, which were issued under SBI’s $5 billion medium-term note programme, are rated Baa2 by Moody’s and a notch lower, BBB-, by Standard and Poor’s. Both ratings are the same as India’s foreign-currency debt ceiling. The Indian government owns 59.4% of SBI.
"The rating assigned to SBI's new bond issuance reflects its dominant local franchise and its international loan book, one of most significant among Indian commercial banks," said Nondas Nicolaides, a senior analyst in Moody's Financial Institutions Group.
The rating also takes into consideration the bank's “relatively good financial fundamentals with a comfortable capital position, although there are some asset-quality and cost-related challenges”, he noted. In particular, there has been a surge in provisions for non-performing loans, and also mark-to-market losses on treasury investments because of the rising interest rates in India.
