Bharti Airtel sold a €750 million ($1 billion) senior unsecured five-year note on Tuesday and while it is common knowledge that the euro market is able to offer Asian issuers tighter pricing versus the dollar, it is debatable whether this was the case here.
“For euro trades, it has benefits in terms of diversity of investor base, for example,” said a syndicate banker from a rival bank. “But what I would argue in the case of Bharti is that it certainly came at a price.”
“Some issuances in Asia, like the Koreans and the Hutchinsons, have been able to achieve [competitive pricing] without having to pay up for it,” he added.
The euro bond – issued by Bharti International (Netherlands) – which had an initial price guidance of euro mid-swaps plus 325bp, ended up pricing 25bp tighter at mid-swaps plus 300bp, according to a term sheet seen by FinanceAsia. The Reg S note has a coupon of 4%.
However, after taking into account cross currency swaps and differences between coupon conventions in a euro versus dollar deal – annually for the former and semi-annually for the latter – some experts calculated that the deal swaps back to slightly over dollar mid-swaps plus 330bp, suggesting that the issuer had to pay an extra 30bp to get the deal done in euro.
Bharti could have directly issued a five-year dollar note at about Treasuries plus 300bp, estimates a Hong Kong-based syndicated banker who used the company’s existing 10-year dollar notes as a reference and used 5- to 10-year spreads of other comparables to adjust for its curve.
For example, BBB-rated China Overseas Land’s has a 60bp-65bp spread difference between its five- and 10-year curve, while high-grade comparables such as AIA and Hutchinson’s spread are about 50bp. Bharti’s existing 10-years were trading about Treasuries plus 350bp, which is a G-spread of 365bp. This translates to a fair value of Treasuries plus 300bp-310bp for a five-year note.
In secondary markets, Bharti’s note is now trading 25bp tighter.
“It’s tightened quite a lot in secondaries, which shows that it’s not as cost efficient as anticipated,” said a syndicate banker.
However, in Bharti’s defense, sources close to the deal notes that the issuer is using the proceeds in euros instead of the dollar and that the coupon of 4% for the former transaction is extremely attractive compared to a 4.7% coupon they would have had to pay for a five-year dollar deal.
In the case of Bharti, BBB- rated Oil and Natural Gas Corp’s (ONGC) – an Indian multinational oil and gas company – is a better comparable versus A- rated credits like Hutchinson Whampoa and AIA, highlights the source. For example, ONGC’s five- to 10-year curve is about 35bp, indicating that Bharti’s new five-year dollar trade should come around Treasuries plus 325bp-335bp.
This results in a coupon of 4.7%, after adding 325bp to a five-year US Treasury yield of 1.44%.
“The US dollar comparison is not as meaningful in this context,” said the source. “The apples-to-apples comparison is very similar if you look at where the euro priced versus a theoretical US dollar deal.”
“This also does not factor in swap charges and the benefits of accessing a new investor base,” he added.
Strong order book
Nonetheless, Bharti’s euro deal received a total order book of €3.8 billion from more than 370 accounts. Fund managers subscribed to a bulk of it, accounting for 77%, followed by insurance/supranationals with 9%, private banks 9% and financial institutions 5%, according to a term sheet.
UK investors purchased 38% of the notes, followed by Germany/Austria 18%, France 9%, Asia 9%, Switzerland 7%, Netherlands 7%, Scandinavia 6% and other Europe 6%.
“It was a successful deal, as you have seen from the terms of the deal,” said a source close to the deal. “It was able to upsize it to €750 million from a benchmark size.”
This is the third major bond sale by an Indian firm after the May 24 tapering talk by the US Fed, which spiked interest rates in western markets. The other two have been HDFC Bank’s $500 million in October and ICICI Bank’s $750 million last month.
Barclays, BNP Paribas, Deutsche Bank, JPMorgan, Standard Chartered and UBS are joint bookrunners of the Baa3/BBB- rated deal.