Indian Oil sets benchmark with jumbo bond sale

Limited supply has caused fixed income investors to pile into the oil refining company’s $900 million dollar bond – the country's largest non-bank issue in over three years.

State-backed oil producer Indian Oil has completed the largest dollar bond issue by a non-bank Indian corporation in more than three years to raise working capital.

Some bond traders described the new issue on Thursday as opportunistic given that it was executed on the back of a 30% fall in global crude oil prices over the last three months. Indian Oil, which owns nearly half of the country’s oil refineries, is a clear beneficiary.

The five-year bond sale has also indirectly benefitted from the thin supply of offshore bonds out of the industrial sector last year. India’s debt capital markets were finance-heavy in 2018 with major bond sales from the likes of Export-Import Bank of India, Yes Bank and Power Finance Corporation.

Indian Oil’s new issue also ties in well with growing demand for intermediate-term bonds from high-grade Indian credit. The company’s Baa2/BBB- rating is on par with the sovereign credit, making it an ideal debt instrument for fixed income investors to increase their exposure in India.

Official statistics show that the order book for the Reg S deal peaked at a whopping $3.5 billion before dropping to about $1.9 billion at the close. Such robust demand allowed the issuer to tighten the pricing drastically by 27.5 basis points from its initial guidance of 250bp over five-year US Treasuries.

In the end, Indian Oil finalised the deal size at $900 million, with pricing fixed at 4.774% on a coupon of 4.75% and a 99.894% reoffer price. That equates to a spread of 222.5bp over Treasuries.

The new issue will set a benchmark due to its sheer size. It is the largest dollar bond from by a non-bank Indian credit since June 2015, when Bharti Airtel raised $1 billion from a 10-year issue.

Pricing was fairly straightforward for Indian Oil’s new 2024s because the company has an outstanding $500 million bond due August 2023.

At the time of pricing, Indian Oil’s 2023s were trading at 199bp over Treasuries, which implies that the 2024s were issued with a 23.5bp premium. That is fairly modest after taking into consideration the five-month maturity extension on the new issue due January 2024.

It is worth noting that overall demand for the new bond did not appear to be affected by the stock’s weak performance last year, which pushed its dividend yield to a very attractive level of 6.7%.

The new deal attracted 165 accounts with 45% of the demand from banks, 41% from funds, 10% from private banks and 4% from sovereign wealth funds and high-net-worth individuals. By geography, 51% came from Asia and 47% from Europe, the Middle East and Africa.

Joint bookrunners of the bond sale were Citigroup, DBS, SBI Capital Markets, Standard Chartered and Westpac.

Bharat Petroleum, another government-controlled oil company that has the same credit rating to Indian Oil, is expected to follow its larger peer with its own US dollar bond sale in the next few days.

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