General syndication is underway for Housing Development Finance Corporation's (HDFC) $100 million five-year loan-style FRN following the closing of the sub-underwriting stage last week. Bank of Baroda, State Bank of India and Emirates Bank have joined arranger Barclays Capital as sub-underwriters with commitments of $25 million each.
Despite the current political stand-off between India and Pakistan, the deal received good interest during roadshows in Singapore and Hong Kong earlier in the week. The deal offers fees of 50bp for sub-underwriters, while co-arrangers, lead managers and managers will receive fees of 35bp, 30bp and 25bp for commitments of $10 million, $5-$10 million and $2-$5 million respectively. Sub-underwriters receive all-in of 90bp, while co-arrangers, leads and co-leads receive 87bp, 86bp and 85bp respectively.
HDFC will pay a coupon of Libor minus 1.67% on the FRNs, which will be issued at par. HDFC will redeem the notes at a premium of 15% upon maturity. Noteholders will effectively receive a coupon of 80bp over Libor as Barclays will make up for the difference. However, noteholders will have to sell the redemption premium to Barclays.
Some observers believe the loan spread is too cheap compared to what the borrower should have paid for a complex structure. Other Indian borrowers have paid a spread of around 85bp for straightforward deals. Also given that it was not a plain vanilla loan, the spread should have been at least 100bp over Libor.
At issue is also the $75 million loan arranged for Industrial Development Bank of India (IDBI) last week by Citibank/SSB. The three-year IDBI loan was priced at 102bp over Libor. IDBI had last raised $100 million from the market in December 2000 when it paid a spread of 67.5bp over Libor for a five-year term loan arranged by Standard Chartered, Sumitomo Bank and Bank of Tokyo-Mitsubishi.
Some observers argue that the rarity value of a deal from HDFC helped it achieve such a competitive pricing. HDFC is not as frequent a borrower as IDBI although it last tapped a foreign currency loan in August 2001. At that time HDFC raised JPY12 billion through a five-year syndicated loan arranged by State Bank of India. DBS Bank and RZB Austria joined the facility as co-leads.
That loan paid a margin of 75bp over Libor for the first two years and 85bp for the remainder of the facility. Commitments received totalled JPY25.7 billion while the total allocation to the 12 participating banks and financial institutions was JPY 12 billion. This was despite the deal being launched only two weeks before the '911' attacks and closed subsequently.
For the present borrowing, HDFC has also not had to pay a premium for the risk of war breaking out between India and Pakistan. Bond spreads in India had widened considerably last week over fears of the war only to recede later following the Indian government's decision to allow Pakistan airlines to use its airspace. The deal is seeing good interest from banks in Hong Kong and Singapore and commitments are likely to exceed the $100 million required by HDFC.
However, HDFC will not upsize the deal as it would have to obtain approval from the government of India for borrowings in excess of $100 million. For foreign borrowings up to $100 million, approval from Reserve Bank of India is sufficient.
The unique structure - the first of its kind for an Indian borrower - of HDFC's loan style-FRN sets a new benchmark for the borrower. The average cost of HDFC's borrowings is in the range of 8.5% to 9.5%. HDFC recently tapped the domestic bond markets raising INR500 million through five-year bonds at a coupon of 8.6%. The company boasts a cost-income ratio of 13.8%, one of the lowest in financial services in Asia.
Says Conrad D'Souza, general manager, treasury, HDFC, "Most banks in Asia have a cost-income ratio of around 40%. In India, no bank, with the exception of our subsidiary, HDFC Bank, has a cost-income ratio of below 50%. HDFC Bank's cost-income ratio is 47%."
HDFC also wants to borrow from the international markets because interest rates in India are still high - State Bank of India's prime lending rate (PLR) is 11% for a five-year borrowing - and domestic banks are also not willing to lend long-term. Moreover, HDFC has certain reserves that cannot be utilised for anything other than redemption premiums under the Indian Companies Act.
With the intention of keeping its foreign borrowings at 7% to 8% of total borrowings and also diversifying its lender base, HDFC is looking at borrowing up to $200 million in the current financial year ending March 2003. It is likely that HDFC will tap the loan markets again in the third quarter of this year to raise another $100 million. As of now, HDFC would not tap the global bond markets because of the competitive advantages it gets in terms of pricing in the loan markets. If it were to launch a bond issue, not only would it have to undergo the administrative hassles of a bond deal such as ratings, etc. but also it would be paying far more because of the constraints of the sovereign rating.