Indian Overseas Bank braves tough market with debut bond

No mean feat: Indian Overseas Bank overcomes challenging markets to price a debut $500 million bond at the tight end.

Indian Overseas Bank, acting through its Hong Kong branch, last night priced a $500 million 5.5-year bond at the tight end of guidance. Getting a deal across the finish line for the debut borrower was no mean feat, as credit markets whipped wider yesterday.

Citi, HSBC, J.P. Morgan, Royal Bank of Scotland and Standard Chartered were joint bookrunners. The bonds priced at Treasuries plus 290bp, at the tight end of the Treasuries plus 290bp to 295bp final guidance and at least 10bp inside the initial guidance in the area of Treasuries plus 300bp.

Credit markets were weaker yesterday, with selling in newly issued bonds, including Franshion Properties, which slipped below par. Yesterday morning, Indian bank paper widened about 5bp and continued to widen further by 5bp to 7bp in the afternoon, which made the bookbuilding process challenging. But, in the end, the leads were able to achieve the issuer’s pricing and size objectives.

The bond gathered an order book of $1.9 billion from more than 180 accounts. Asian investors bought 66% of the deal, European investors 28% and offshore US investors 6%. Banks bought 35%, asset managers 31%, private banks 24% and insurers 10%.

The coupon was fixed at 5% and the senior notes were reoffered at 99.478 to yield 5.11%.

Public sector lender Indian Overseas Bank is due to report its earnings for its financial year ended March 2011 in a few weeks time and some investors questioned its decision to launch a deal before its earnings were announced.

However, one source familiar with the deal defended the decision and said that the bank had picked the right window to launch a trade ahead of other Indian banks.

“Indian Overseas Bank isn’t a high-yield bond. It has been in operation for more than 70 years and it is not expected to post any sudden surprises,” said the source. The bank is rated Baa3/BBB- by Moody’s/S&P.

Investors are comparing the bonds to issues by IDBI and the Union Bank of India, due in 2016, which were at z-spreads of 231bp and 229bp respectively before Indian Overseas Bank launched its deal. The former later widened to a z-spread of 245bp. According to Nomura analyst William Mak, the fair value for the Indian Overseas Bank October 2016s is Treasuries plus 280bp or a z-spread of 246bp. A z-spread is a measure of credit spreads without the distortion of a yield-to-maturity calculation.

The government of India owns 65.9% of Indian Overseas Bank and it will count as an event of default if the government ceases to own more than 50% of the voting securities of the bank.

The bank is headquartered in Chennai and had assets of Rp2,251.9 billion as of December 31, 2010. It is the ninth-largest public sector bank in India in terms of assets.

Away from Indian Overseas Bank, Indika Energy has mandated Citi as sole global coordinator and bookrunner for its bond exchange and new note issue. Citi, Goldman Sachs, Standard Chartered Bank and UBS are also bookrunners.

The company is offering to exchange up to $165 million of the $250 million notes due 2012 for a new US dollar seven-year bond. The new notes are expected to be rated B1 (positive outlook) by Moody’s and B+ (stable outlook) by Fitch.

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