ICICI Bank UK issues $500 million FRN

Appetite for IndiaÆs second-largest bank helps UK subsidiary raise $500 million.
Despite its short history, ICICI BankÆs 100% owned UK subsidiary priced a five-year senior unsecured $500 million floating rate note (FRN) inside guidance on Thursday evening.

The final price of the Singapore-listed, Reg-S issue was 62bp over three-month Libor, compared to initial guidance in the area of 65bp. Final guidance was between 62bp and 64bp. This is the tightest pricing ever for a five-year issue from ICICI, say specialists.

The funds are to be used to buttress growth, which has seen assets rocket from $0.11 billion in 2004 to $3.6 billion in 2006. The bank was set up in 2003.

Deutsche Bank and Barclays Capital arranged the deal.

Demand for the deal came in at $1.7 billion, giving an over-subscription rate of 3.5 times and pushing the amount raised to $500 million, top of the $300-$500 million range. ôFollowing the monster offering by the parent in early January, this deals shows appetite for Indian banking stocks is undimmed,ö says one source close to the deal.

That earlier $2 billion deal attracted demand of $8 billion, instantly causing the Indian banking sector to shoot up in terms of visibility. The January offering attracted around 230 investors, but the ICICI Bank UK offering attracted 13 fresh investors to the deal, says one source.

In total 86 accounts from 25 countries participated. 8% of the demand came from central banks and pension funds, 48% from funds, 39% from banks and 5% was retail. The geographic split was 38% out of Asia and 62% out of Europe.

One specialist disputes the assertion in some media that the previous deals were priced too aggressively and had frightened off investors, pointing out that in early trading the deal tightened to 61.60bp over Libor.

ôThat shows the deal was priced pretty much on the money,ö he says. "ItÆs a Goldilocks scenario, neither too hot nor too cold.ö

Comparing the final price of the UK issue to issues by the parent is complicated because of the different treatments of bank capital offerings in the UK and India.

Thus, ICICI UK has already issued an upper tier-2 perpetual bond with a ten-year coupon step-up, as permitted by the UKÆs Financial Services Authority (FSA). This trades at 139bp over Libor.

In India, banks typically issue upper tier-2 capital instruments with a fifteen-year maturity and with a step-up after 10 years û as ICICI has done. The difference between a perpetual issue and a dated issue is roughly regarded as 15 basis points, equating to an implied price for the ICICI UK upper tier-2 offering of 124 basis points over Libor.

Since ICICI IndiaÆs own dated upper tier-2 trades at 105bp, there is a spread of 19bp for ICICI UKÆs implied price over its parent in dated upper tier-2 paper. Conversely, the implied spread of two perpetual issues is also 19bp: 120bp for ICICI India compared to 139bp for ICICI UK.

ICICI India has also issued a senior 5-year FRN, which trades at 57bp over Libor. To find the implied price of ICICI UKÆs senior FRN, specialists applied the parentÆs ratio of senior to dated upper tier-2 issuance to ICICI UK, equalized for dated versus perpetual issues.

That resulted in an implied price of the current five-year ICICI UK issue of 67bp over Libor.

ôBut since the deal priced at 62bp, we can say that the deal has broken through its implied curve by five basis points,ö says a specialist.

The subsidiaryÆs Baa1 long-term debt and bank deposit rating is higher than the parentÆs, which attracted investors, say specialists.

ICICI Bank UK is the largest overseas subsidiary of ICICI Bank and is regarded as the vanguard of the bankÆs overseas expansion. It has five branches in the UK, mostly in areas where the bank could find a concentration of overseas Indians, considered a lucrative market thanks to their remittances home and personal wealth.

The bankÆs cost-to-income is attractively low, say observers, because it can piggyback off the back office operations of its giant parent. According to MoodyÆs, the bankÆs main lending exposure is to subsidiaries of large Indian companies. Given that the bank was advisor to some 70% of Indian acquisitions in 2005 in the UK, the bank also has the ability to collect a large proportion of its revenue in fees, which amount to 60% of its corporate banking revenue.
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