The pricing of a bond issue by ICICI Bank, India's second largest private bank, has acted as a declaration that the two-month lull in the Asia primary bond markets is finally over.
ICICI sold $500 million of senior unsecured Baa2/BBB-rated bonds early Friday morning. The 144A/Reg-S issue printed with a five-and-a-half year maturity and 5% coupon. The notes priced at par, with a 5% yield which was equivalent to a spread of 320bp over the US Treasury yield.
The deal had been formally announced on Thursday afternoon and, within three hours, initial guidance had been posted. Guidance was set at around Treasuries plus 320bp. At the time of the announcement, Axis Bank's 2015s ($350 million five-and-a-half year) -- a comparable Indian bank's bonds -- were trading at 350bp over the equivalent five-year Treasury yield, while ICICI's own 2015s had been trading at around 288bp.
As one banker explained, the curve between March 2015 and January 2016 was worth about 27bp. Adding this 27bp to the 288bp (for the existing ICICI 2015s) brought the spread to 315bp. By setting guidance at 320bp, it implied a 5bp new issue premium.
"ICICI already has a 2015 maturity so for them it made sense to space out their tenders," said a source. The maturity for these new five-and-a-half year bonds is January 15, 2016.
Joint bookrunners for the sale were Bank of America Merrill Lynch, Deutsche Bank and HSBC.
The deal attracted over 150 accounts securing an order size of $950 million. Asia investors bought 52% of the issue, offshore US investors 25% and European accounts 23%. By investor-type, fund managers took 53% of the transaction, retail 23%, banks 19%, insurance companies 4% and others 1%.
The large allocation to retail buyers was quite typical for an Indian bond issue; they were attracted by the high coupon of 5%.
When the bonds started trading in the secondary market, some institutional investors sold their holdings. By the end of Friday, the comparable Axis 2015s were still trading around 350bp, but the new ICICI issue was trading slightly wider from where it came to market, at 328bp.
A key take away from this transaction was the credit differentiation spread with respect to Axis Bank, which also holds a Baa2/BBB rating. "When Axis priced (on March 28, 2010), at least from a secondary market perspective, it had come either in line or tighter than where ICICI would've been," said a source.
In fact, when Axis was done back in March, the existing ICICI 2015s had been used as the benchmark for the transaction. At the time, the Axis bonds priced about 20bp inside the ICICI curve.
But, ICICI Bank is a seasoned borrower, with a higher credit profile and is bigger than Axis. Achieving a superior credit differentiation was a key objective for the deal.
"The deal showcased that there is a credit differential and the market sees the value in pricing ICICI bonds meaningfully tighter from Axis," added the source.
The markets have certainly woken from their two-month slumber with the Bank of East Asia pricing its $450 million 10-year bond late Friday as well as Li & Fung returning with a $350 million tap of its existing 5.25% 10-year notes. "Banks are extremely busy after that period of quiet," said one banker. Despite the volatility, deals are getting done.
There are strong market rumours of a full Korean pipeline, so more financial institutions and quasi-sovereigns are likely to launch deals. Other Indian banks may also be planning to sell debt offshore.
"Borrowers are out there looking for an opportunistic window, and judging how the market is, we can expect more [deals] to come this week," said a banker.