State Bank of India completed the country’s first US dollar-denominated Additional Tier 1 capital (AT1) deal on Wednesday, paving the way for other lenders to follow suit in a country where bad loans are piling up.
However, the perpetual non-call five-year, Basel-III compliant transaction received a decidedly cool reception from investors, leading to a reduction in issue size from $500 million to $300 million.
The Baa3/BBB-/BBB- rated bank only managed to capture peak demand of $700 million shortly before the release of final price guidance according to one syndicate banker.
This stands in sharp contract to Singapore’s DBS, whose debut dollar-denominated AT1 bond attracted a peak order book of $8 billion at the very end of August.
Credit analysts and non-syndicate sales desks roundly criticised the country's largest commercial bank for setting out with overly aggressive price guidance, which it was subsequently unable to tighten.
The B1/B+ rated deal was initially pitched around the mid 5% range.
Final pricing, in the name of SBI’s Dubai branch, was fixed at par on a coupon and yield of 5.5%.
The bond is callable on 22 September 2021 when the interest rate resets to 427.5bp over the prevailing five-year Treasury rate.
One syndicate banker defended the strategy, arguing that the majority government-owned bank was keen to focus on price rather than size. "This deal sets the pricing benchmark for all other issuers," the banker commented.
The issue’s small size and rarity value might have played well with investors. However, these two positive factors were more than counterbalanced by the potential impact of India's write-down language, which considerably elevates non-payment risk relative to other Asian bank capital transactions.
In India, the point of non-viability (PONV) lies at the discretion of the Reserve Bank of India and can lead to full or partial permanent write-down. But the key sticking point was one of the triggers - if the government makes a capital injection in the bank and it has done so every year since 2012.
A temporary write-down can also be triggered if bank's core tier-1 ratio falls below 5.5% before March 2019 or below 6.125% after March 2019.
Coupons can only be paid out of current year profits or revenue reserves subject to RBI capital requirements. SBI also has the right to cancel distributions on a non-cumulative basis.
“The group's inability to tighten pricing underscores a cautious attitude towards Indian subordinated paper,” one Hong Kong-based investor told FinanceAsia.
"Pricing with a 5% handle looks pretty aggressive to me," the fund manager added.
With its single B rating, SBI's deal ranks as Asia's lowest rated AT1 deal.
As such, one syndicate banker said it was hard to pinpoint a direct comparable, but estimated fair value at 5.57% level. This was based on SBI's existing senior curve and the indicative AT1 to senior spread of banks such as DBS and ICBC.
ICBC Asia’s recent $1 billion Ba1 rated 4.25% perpetual non-call July 2021 was trading on a mid-yield around the 4.48% level on Wednesday, or G-spread of 322bp.
Its parent’s $500 million 1.875% A1/A rated August 2019 senior deal was trading on a G-spread of 105bp.
This equates to a senior/AT1 spread multiple of three times.
On Wednesday, SBI’s outstanding $750 million 3.622% April 2019 deal was trading on a G-spread of 136bp according to a syndicate sales note. This implies a senior/AT1 spread multiple of 3.14 times.
In a September 14 note, Moody's forecasts that SBI’s AT1 issue will improve the bank's tier-1 ratio by 30bp to 40bp. The rating agency believes its core tier-1 ratio will improve to 11.2%, up from 10.7% at the end of June.
Non-performing loans are on a rising trend, hitting 6.94% in June on a gross basis and up from 6.4% in March. However, in a recent sales note Kotak forecasts they are peaking for SBI at least.