India Exim made its second foray of the year in the international bond markets on Thursday with an aggressively priced $1 billion bond deal.
The 100% sovereign-owned bank has a reputation for pushing down on pricing and in this instance felt confident it would get away with it, knowing the market is awash with liquidity and US investors have been starved of Indian sovereign paper for a long time.
As a result, syndicate bankers said it was American investors who took the lead on the 10-year transaction, a rare occurrence in Asian debt capital markets these days.
"Asian investors were quite focused on where other Indian financial comparables were trading and some dropped away when guidance was revised," said one banker. "But US investors just kept piling in as this is India Exim's first 144a deal and it offered them a very rare opportunity to gain access to sovereign credit."
The banker added that while the $2.6 billion peak order book was lower than the $5 billion Adani Transmission amassed for a rival transaction on the same day, it was of very high quality and closed at the $2.5 billion level.
"This was one of the best order books I've seen in a while," the banker commented. "There was very significant interest from US public institutions and pension funds."
A total of 157 accounts participated in total of which 61% were from the US, 20% from Asia and 19% Europe. By investor type, funds took 76%, insurers and pension funds 11%, sovereign wealth funds and central banks 5% and banks 5%.
Cost-conscious Indian issuers do not often target the 144a market. The country's largest private sector bank, ICICI, used the format in March, but before that the last real benchmark came from State Bank of India (SBI) in 2014.
A $1 billion dual tranche bond for government-owned ONGC, which was priced last week, came in Reg S format. Its secondary market performance provided a very good launch platform for Exim.
The Baa2/BBB- rated credit priced the 10-year tranche of its deal at 220bp over Treasuries. At Thursday's close in Asia, it was trading 15bp tighter at a mid-spread of 205bp.
Bankers said another point in favour of Exim's new deal is the fact it is EMBI eligible in contrast to previous Reg S deals, which have a 40-day seasoning period.
Having initially marketed the deal at 210bp level over Treasuries, the syndicate fixed final pricing at 99.933% on a coupon of 3.375% to yield 3.383% or 187.5bp over Treasuries.
The main benchmark was the recent five-and-a-half year issue Exim executed in January. This 3.125% July 2021 bond was trading on a G-spread of 158bp on Thursday according to syndicate bankers.
This means the new deal has offered a 29.5bp premium over its outstanding paper in return for a five-year maturity extension. Syndicate bankers estimated it came 2.5bp through fair value.
In analysing what the five- to 10-year curve was worth most investors and fixed income analysts looked at ICICI, which has the same Baa3/BBB- rating as Exim.
ICICI's 3.5% March 2020 bond was trading on a G-spread of 165bp on Thursday and its March 2026 bond on a G-spread of 205bp. This equates to a 40bp curve.
Exim also has a March 2020 bond, which was being quoted around 150bp over on a G-spread basis, or 15bp through ICICI. Its new bond has priced 17.5p through ICICI.
However as one syndicate banker argued: "Exim should have a slightly flatter curve than ICICI as it is 100% government owned and the deal is EMBI eligible."
In a research note ahead of publication, Credit Agricole pitched fair value at 195bp to 200bp over Treasuries. It looked at the respective trading levels of Exim and SBI, which both have 2019 bonds outstanding and noted a 7bp differential between the two in favour of SBI.
The latter has lower government ownership as it is a listed entity, but it has a higher stand-alone credit rating of Ba1/BBB- compared to Exim's Ba3/BBB. Last week, Moody's cut Exim's stand-alone rating by one notch, citing rising non-performing loans (NPLs).
However, it retained the overall rating. In its rating assessment it said a sharp deterioration in asset quality was similar to other rated state-owned banks. Between end March 2015 and end June 2016 NPLs rose from 2.9% to 7.9%.
"The source of this deterioration primarily comes from legacy loans granted over 2008 to 2013," it wrote. "Our assessment of Exim's credit profile factors in a possible further increase in the NPL ratio, as more of these legacy loans may turn into NPLs."