BoI completes upsized bank capital deal

Bank of India taps the international bank capital market in preparation for the impending arrival of Basel II.
Barclays, Citigroup, Deutsche Bank and HSBC completed IndiaÆs second upper tier-2 subordinated debt offering to be sold into the international markets on Thursday with a $240 million transaction for Bank of India (BoI).

The deal follows UTI Bank, which was the first to tap the market in August after India's central bank relaxed guidelines on the issuance of foreign currency debt and hybrid instruments.

The leads took advantage of fortunate timing to complete a deal that was upsized and eventually priced at the tight end of guidance.

This week has been relatively quiet in the bond markets compared to last week, but the size of the order book for BoI shows that the market remains hungry for new deals.

Initial guidance for the Baa2/BB- rated Reg-S only deal was released at 145bp to 155bp over mid-swaps with a proposed deal size of $200 million.

However, as the book build gathered momentum, guidance was revised to 140bp to 145bp over range on Thursday morning. That was further revised to 138bp to 140bp over, as the book topped the billion dollar mark and the deal size was raised to $240 million.

Final pricing for the 15-year non-call 10 deal came at 99.675% with a 6.625% semi-annual coupon. That equates to a spread of 138bp over mid-swaps or 189.9bp over 10-year US Treasuries. The coupon steps up to six-month Libor plus 238bp if not called.

Over 100 accounts took part in the deal. Geographically, 41% went to Asian accounts, 39% to UK books, 19% to other Europe, and 1% to offshore US accounts.

In terms of investor type, banks bought 51%, asset and fund managers took 34%, insurers 8%, retails 2% and others 5%.

The clearest comparable deal to BoI is last month's Baa3/BB- rated UTI Bank upper tier-2 deal. That deal is also a 15-year non-call 10 offering and is trading at 170bp over Libor. Meaning that, in spite of having only the single notch advantage from MoodyÆs in terms of rating strength, BoIÆs deal is a marked 32bp inside of UTI.

However, BoI does have an implicit guarantee from the Indian government which owns 69.74% of the bank.

BoI also has a more reserved loan growth average than other Indian banks. As of March, BoI had a year-on-year loan growth of 16.9%, compared to an industry average of around 36%. Slower loan growth means that BoI has a safer asset portfolio in the event that the economy suffers from a downturn.

Regulatory capital deals issued in the rupee market since the Reserve Bank of India (RBI) sanctioned them last year have met with varied success and are limited by a relatively narrow investor base which obstructs issuers from offering larger transactions.

In order to give the domestic banks more options to raise capital to meet both their business needs and Basel II capital adequacy standards, the RBI amended guidelines making it easier for banks to augment their capital by issuing foreign currency debt and hybrid instruments.

It is a further relaxation from existing guidelines that were outlined on January 25. Previously banks could issue such instruments in Indian rupees but were required to obtain RBI approval on a case-by-case basis for an issue in foreign currency.

Now banks are allowed to issue innovative perpetual debt instruments in foreign currency up to 49% of the eligible 15% of their tier-1 capital without prior RBI permission. They may also issue upper tier-2 instruments in foreign currency up to 25% of their unimpaired tier-1 capital without prior approval, subject to compliance with certain specified conditions.

Consequently, Bank of India will use the proceeds to strengthen its capital adequacy ratio which was last quoted at 10.36% as at June 30.
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