Bank of Baroda and Woori Bank sell 5.5-year bonds

India's Bank of Baroda raises $350 million and Korea's Woori pockets $500 million, both taking advantage of the current steepness in the yield curve between five and six years to lure investors with a higher coupon.

Bank of Baroda and Woori Bank both issued 5.5-year bonds early Tuesday morning Hong Kong time. Korea's Woori brought the bigger of the two deals at $500 million, while India's Baroda raised $350 million.

Baroda, which is rated Baa2 by Moody's and BBB by Standard and Poor's, issued Reg-S senior fixed-rate notes with a coupon of 4.75% and a yield of 4.886%. The maturity date was set to October 7, 2015.

Initial guidance was indicated at Treasuries plus 235bp, which was tightened to 230bp to 235bp before the close of Monday's trading session in Asia. And with an order book of $1.4 billion -- four times the deal size -- the bookrunners were able to price the bonds at the tight end of that guidance, at 230bp over the equivalent five-year Treasury yield. By late Tuesday afternoon the bonds were trading about 6bp tighter at a spread of 228bp to 224bp.

The deal was arranged by Barclays Capital, Citi, Deutsche Bank, HSBC and Standard Chartered, which together secured orders from 150 accounts.

In the final allocation, Asian investors received 62%, buyers from Europe got 30% and offshore US investors were given 8%. Fund managers were the biggest buyers of Baroda's debt, taking 52% of the pie. Banks took 24%, retail received 20% and other investors were sold 4%.

The initial mandate for the deal was announced on February 3 when Baroda went out seeking to bring a five-year senior fixed-rate security to the market. At that time, initial price guidance was announced at 250bp over mid-swaps. However due to the volatility in the market, the company postponed the deal in order to wait for a calmer backdrop to launch.

After Axis Bank and Bank of India successfully priced last week, Baroda saw an opportunity to act swiftly and it priced the deal within an eight-hour window. This time, the tenor was extended to 5.5 years and price guidance was quoted relative to five-year Treasury yields due to dramatic intra-day swings in swap spreads.

"Swap spreads have been all over the place," said one banker. "Five-year swaps went from a high print of 27bp on March 17 to an intra-day low of 6.5bp on March 25," he added.

In terms of the change from a five-year tenor to 5.5 years, one source said that this was driven by the fact that a large percentage of investors are total return buyers and, with the current steepness of the yield curve between five and six years, they can get a higher coupon for a six-month tenor extension.

"As long as yield curves remain as steep as they are now, the best returns...come at the point where tenor is extended out by that six-month window," said one banker.

At the same time, issuers get an extra six-month duration at no extra cost once they swap the cash flows from fixed to floating. This convenient arrangement will last so long as the yield curve remains this steep. Once the curve flattens, investors will prefer five-year bullets.

Other banks to issue bonds with a 5.5-year tenor this year are Industrial Bank of Korea, Korea Development Bank, Kexim, Shinhan Bank and Bank of India.

Also included in this growing group of issuers is Woori Bank (rated A2 by Moody's), whose $500 million 5.5-year bond yesterday was reoffered at 99.38 to yield 4.629%. The coupon was set at 4.5%. The sale was conducted through Woori's $7 billion global medium-term note programme.

Final guidance was set at 200bp to 210bp over Treasuries. The bonds priced at the mid-point of that guidance at 205bp, which put it about 14bp above Woori's existing February 2015 bonds on a yield basis. At the time of pricing, the February 2015s were trading at 191bp over Treasuries which, given the difference in maturities, implied no new issue premium for the new bonds. As one source close to the deal said, "this equates to a tighter print to the Treasury curve than the existing February 2015 deal".

By the opening of Asian trading Tuesday, the bonds had tightened to 198bp, but at the end of the session, the spread had widned back out to 206.5bp -- slightly above the issue level.

The final order size was $1.7 billion split on 140 accounts. Asia received 51% of the allocation, Europe 29% and offshore US investors 20%. The distribution to different types of investors was fairly evenly spread with banks getting 28%, fund managers 24% and asset managers 26%. Insurance houses took 5%, and retail investors ended up with 17%.

The lead managers for the Woori transaction were Bank of America Merrill Lynch, Credit Agricole CIB, Deutsche Bank, J.P. Morgan and Morgan Stanley. Woori Investment and Securities were non-bookrunner arrangers on this deal. Bank of Montreal and Commerzbank were co-managers.

Meanwhile, fellow Korean lender Hana Bank began a series of investor meetings Monday that will end today. Bank of America Merrill Lynch, Citi, J.P. Morgan and Royal Bank of Scotland are joint arrangers for the investor talks. There has been no indication either of the size, price or tenor of that deal.

¬ Haymarket Media Limited. All rights reserved.
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