SBI sets benchmark with $750 million five-year bond

State Bank of India (SBI), majority-owned by the government, set a benchmark for future Indian issuers when it a priced a $750 million five-year bond in the early hours of yesterday morning Hong Kong time.

Initial price guidance of mid-swaps plus 200bp-215bp on Tuesday was revised to 190bp-200bp after the order book grew rapidly to $5 billion from 250 accounts. The issue spread was finally fixed at 190bp over mid-swaps, which translated into 226.4bp over the yield of the five-year benchmark US Treasury bond at the time of pricing. Using mid-swaps guidance reflected the way the bank sets its funding targets, but also the lack of directly comparable cash bonds in the secondary market, said Ken Wei Wong, vice-president on the Asian syndicate desk at Barclays Capital.

The notes pay a semi-annual coupon of 4.5%, and were re-offered at 99.779 to yield 4.555% to a maturity date of October 23, 2014.

After the deal was officially announced on October 12, joint bookrunners Barclays Capital, Citi, HSBC, J. P. Morgan and UBS accompanied SBI chairman O.P. Bhatt for a week of roadshows in Singapore, Hong Kong and London.

"The strong order book and the fine pricing is a testimony of the overseas investors' support to the India growth story. SBI set out to create a benchmark transaction and are pleased to have re-opened the market for Indian borrowers," said Bhatt yesterday.

This is the biggest Reg-S deal to come out of India so far and the first international issue by an Indian financial institution since ICICI Bank completed a transaction in 2007. Wong added that it was unnecessary for a credit such as SBI to tap into onshore US investors (by filing for SEC Rule 144a status), "given its funding size and the demand we would expect from Asian and European investors". SBI was able to "achieve its objective of setting an international standard for Indian bank senior debt with a US dollar benchmark size transaction in the Reg-S only market", he said.

More than half of the notes were placed in Europe, where investors bought 58%, while Asian accounts took 33% and offshore US investors bought the remaining 9%.

Private banks -- no doubt a conduit for substantial non-resident Indian (NRI) participation -- were allocated 36% of the deal, asset/fund managers were sold 46%, commercial banks 11% and others, including pension funds, took the rest.

The bonds were priced inside SBI's secondary market curve, notably its 2012-dated floating-rate notes which, albeit illiquid, were quoted at Libor plus 245bp on Tuesday. In the early afternoon yesterday, the new bonds were trading around the launch yield spread at 227bp-224bp.

"Indian bank credits do trade somewhat in a world of their own," said Brayan Lai, credit analyst at Calyon. "It's difficult to trade them against other quality Asian banks due to extremes in individual credit quality -- not to mention what India represents in terms of risk, sovereign deficit issues, aggressive 25%-30% expected asset growth for Indian banks in the medium-term and lack of capital forthcoming from the state, despite a short-dated loan for such purposes recently approved by the World Bank", he added.

The transaction, issued via SBI's London branch and under the bank's $5 billion European medium-term note programme, is rated Baa2 (stable) by Moody's and a notch lower at BBB- (negative) by Standard and Poor's, and will be listed on the Singapore exchange.

SBI has a dominant franchise as the largest (and oldest) commercial bank in India. It has a market share of around 17.6% in deposits and 16.5% in gross loans, rising to around 24%-25% if its fully owned subsidiary banks are taken into account. "SBI is present in all areas of the financial sector through its non-banking subsidiary companies, providing huge potential to the group for cross-selling products," said Moody's in a report published in September. Government support is seen as "almost certain because of SBI's majority government ownership and its systemic importance to the country's national payment system," it added.

Barclay's Wong reiterated that SBI, the recipient of vast retail deposits, had no pressing need for the cash for senior funding, but instead took the opportunity to set a benchmark for future issuance by Indian borrowers.

"This transaction has re-opened the market for Indian credits and set a new benchmark, and the strong order book underlined the strong interest in the India story", said Terence Chia, a vice-president on Citi's Asia debt syndicate desk.

"The deal managed to squeeze the pricing on scarcity-value and, to a larger extent, Western investors' thirst for emerging market assets and yield", concluded Calyon's Lai.