ICICI opens public bond market with $2 billion deal

The deal is significantly upsized, and while some argue that the price is too cheap, all agree that it is great news for Asia's bond markets.
ICICI took the market by surprise early yesterday morning when it succeeded in raising $2 billion in bonds, a significant upsize to the expected initial benchmark deal of between $500 million and $1 billion.

The five-year transaction for the Indian bank, managed by Deutsche Bank, Merrill Lynch and Goldman Sachs, attracted $6.05 billion in demand and priced with a coupon of 6.625%, a yield of 6.645% and a price of 99.916. This equates to a spread over five-year treasuries of 237.5bp.

A total of 214 investors participated in the transaction, with 32% of the bonds selling to banks, 53% to fund managers, 12% to pension funds and 3% to retail investors. Meanwhile, bookrunners allocated 16% to European accounts, 37% to Asian buyers and 43% to US investors.

US investors were a substantial force in leading the transaction, allowing ICICI to diversify its investor base and increase its deposit base. Traditionally, US investors have shied away from Indian bank paper which they have found to be too expensive, but prices have now dropped so the sector has become much more compelling. This allowed ICICI to engage with US investors and helped them garner enough demand to cover the size of the deal.

Indeed, Indian bank spreads have been unattractive due to the supply overhang that has characterised the sector in recent months. According to one syndicate banker: ôThe market was so saturated prior to the crisis that ICICI couldnÆt do any more deals. The bank was accessing the market too frequently.ö

Investors who spoke to FinanceAsia last week railed about how ICICIÆs ad-hoc and all-too-frequent borrowing habits had negatively affected its bond holders. As a result, elements on the buy-side expected a substantial premium for this issue, combined with some kind of commitment that the frequency of future borrowing would be reduced.

As it turned out, investors were rewarded by the size of the deal, which defied all expectations. ôICICI completely took into consideration investor worries. The bank priced a large-size deal, allaying short-term issuance concerns,ö says one investor. "Nonetheless, it would have been good to get an official statement from them regarding future issuance. That's our only preoccupation,ö he adds.

ôImportantly, the pricing was more than generous. We were prepared to buy at 160bp over mid-swaps but they came 10bp back of that.ö

So this begs the question: did ICICI price too cheaply? Some argue it did. The bonds tightened by a full 13bp yesterday, suggesting that the bank potentially left a few too many basis points on the table. Other sources argue that this was critical in order to leave a substantial buffer for potential negative headlines of the sort that have dominated the press over the last few months and which are likely to do so again in the wake of the subprime crisis.

On a credit default swap basis (CDS), a measure which has become the ôde facto benchmarkö for pricing bonds, there is some discrepancy on how market observers are judging ICICIÆs performance. Disagreements stem from the moment at which the CDS levels are used to benchmark the deal û either prior to or after the announcement of guidance, with spreads between new and existing CDS trading levels differing by 40bp, 50bp and 70bp, depending on sources.

On a cash bond basis (ICICI's own January 2012 FRN), the differential stands at between 25bp and 35bp, depending on sources.

One investor says that generous pricing levels are essential in this market. ôMost deals nowadays are coming significantly back from CDS û they have to. All issuers currently need to pay a substantial premium because the market still has not recovered. Royal Bank of Scotland issued a multi-tranche hybrid tier-one $3.1 billion deal two days ago which also tightened substantially."

öBut the key is that ICICI has been a frequent borrower, and it needs to pay for that now. Also, these pricing levels were required in order for this issue size to clear,ö he adds.

Rival bankers argue that the issuer could have issued several smaller tranches, potentially in different currencies, in order to achieve better pricing.

But one investor says he never sees ICICI trade in sterling or euros. "For large benchmark sizes (which they require to fund their loan growth), they need to tap the market that can offer them that size. Those bankers who are criticising the pricing levels and structure of this deal are just expressing sour grapes.ö

Meanwhile, a syndicate banker not involved in the transaction states: "At the end of the day, they did the right thing. They wanted to tap the market, they did it in a large size, they listened to the investors, and they got it done. So they have had a successful deal."

Quarrels aside, there is consensus that this deal has re-opened the public bond market in Asia which have been closed since the subprime crisis began.

ôItÆs a significant trade,ö says another banker. ôItÆs the first big-size investment-grade deal since the subprime troubles began. This says that at the right price there is money for Asian credit, and of all the bank names that could have been done in Asia, this would have been the hardest û just because of its history.ö
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