HDFC draws strong demand for $500 million bond

More than $5 billion of demand helps the Indian lender to print a tight deal.

India’s HDFC Bank raised $500 million of five-year senior debt on Wednesday night. Pricing on the bonds tightened by 25bp from the initial talk as investors embraced the opportunity to buy into the Indian banking sector.

The bonds have a coupon of 3% and were priced at 99.687 to yield 3.068%, which represents a 230bp spread over US Treasuries. HDFC was able to print such a tight deal thanks to $5 billion of demand from more than 250 accounts, according to the leads: Bank of America Merrill Lynch, Citi, J.P. Morgan and Standard Chartered.

Demand carried into secondary trading yesterday, where the bonds tightened by around 5bp — bringing them well inside the 222bp where rival State Bank of India’s 2017 bonds were trading.

Bond investors like HDFC’s strong and consistent financials. Profits were up 30% year-on-year for the last three months of 2012 and it has a capital adequacy ratio of 17%. It is the second-biggest private-sector bank in India, with 2,776 branches and 10,490 ATMs.

“Compared with its peers, HDFC Bank's loan book is less exposed to high-risk sectors, thereby reducing the threat to its asset quality amid challenging macro-economic conditions,” said Moody’s in a report. “On the other hand, the rating is constrained by the tough operating environment and the bank's large exposure to the Indian government through the mandatory holdings of government securities.”

HDFC launched the deal on Wednesday morning, telling investors that it would be raising a benchmark-sized amount with a yield of around 255bp. By the time it issued final guidance in the afternoon the price range was 230bp to 240bp.

Fund managers took 48% of the deal, banks 25%, insurers 8%, sovereign wealth funds 6% and private banks 13%. By region, 65% of investors came from non-Japan Asia, 22% from Europe, 7% from the Middle East and 6% from offshore US accounts.

The bonds are issued under HDFC’s $1 billion Regulation S medium-term note programme. HDFC is rated Baa3 by Moody’s and BBB- by Standard & Poor’s.

Despite the deal’s success, the outlook for India’s banking industry remains weak. “The troubles for the Indian banking system are likely to increase in the next 12 months due to slow economic growth and sluggish fiscal reforms,” according to S&P.

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