SBI makes bond market debut

Government-owned bank uses surprise rating differential to secure tight pricing.

The State Bank of India (SBI) made its international bond market debut yesterday (December 1) with the country's largest offshore bond for institutional investors.

The bank's increased $400 million Reg S deal also ranks as the tightest priced fixed rate deal from India on a Libor basis. Only fellow state-owned bank IDBI has ever secured tighter pricing, bringing a seven-year FRN in 1997 at 70bp over.

SBI priced its five-year deal at 99.574% on a coupon of 4.75% to yield 4.847%. This equates to 117.5bp over Treasuries or 73.5bp over Libor. Lead managers Citigroup, Deutsche Bank and HSBC made fees of 19bp.

SBI is the last of the big four domestic banks to access the market this year following deals for IDBI in February, India Exim in July and ICICI in August. Given that it only tapped for the loan market for the first time in seven years earlier this year, it is an extremely rare credit and pricing was always expected to be aggressive.

But the key to just how aggressive it was lies in the bank's rating, which pierces the sovereign ceiling on Moody's side. SBI has a Baa2 foreign currency rating from the agency, one notch above India's Baa3 rating. The differential between the bank and the sovereign is even more marked in local currency deposit terms, with SBI rated A2 and India Ba2.

From S&P and Fitch, the bank has two non-investment grade ratings of BB/BB+ rating in line with the sovereign.

To some observers, Moody's decision seems somewhat bizarre given that SBI is 59.7% owned by the central bank (Reserve Bank of India), has a local currency balance sheet and is effectively quasi-sovereign risk. No other bank in Asia currently pierces its sovereign ceiling, although Moody's move is not without precedent since it previously rated ICICI above the sovereign.

Until January this year, ICICI had a Baa3 rating, one notch above India's Ba1 rating. However, the two were equalized when the sovereign was upgraded.

This might suggest that that Indian sovereign is still enjoying positive ratings momentum and will be upgraded deeper into investment grade territory in the near future. However, Moody's also upgraded Telekom Malaysia above its sovereign rating in September and has yet to follow through with a sovereign upgrade for either the Federation of Malaysia or any other quasi sovereign credit in the country.

In its ratings release, Moody's justified its move stating that there was a, "relatively low risk that this particular bank's foreign currency bonds may be affected by a possible general moratorium imposed by the Government of India on foreign currency obligations. In such a case, the government may choose to allow foreign currency payments by some favoured classes of issuers such as SBI."

The rating allowed SBI to price 16.5bp through India Exim, whose July 2009 deal was trading at 122bp over Treasuries and 90bp over Libor at the time of pricing. Compared to ICICI and IDBI, pricing was even more aggressive. The former has an August 2009 bond trading at 106bp over Libor and the latter a February 2009 bond at 121bp over.

On a spread to Treasuries basis and spread to Libor basis, the whole Indian curve has traded in since July when India Exim was priced at 185bp over Treasuries and 136bp over Libor. Exim has come in 63bp in Treasury terms and 46bp in Libor terms.

Likewise ICICI has traded in 20bp to 30bp since launch in August. However, with the exception of Exim, Indian deals have a habit of pricing tight, trading wide. Both of ICICI's existing deals (August 2009 and October 2008), plus IDBI's February 2009 issue are still trading marginally below issue price as yields have widened.

SBI nonetheless attracted an order book of $1.1 billion and was upsized from $300 million. Some 118 investors are said to have participated of which 55% came from Europe, 45% from Asia.

European demand broke down further to 25% UK, 16% Continental Europe, 9% offshore US and 6% Middle East. Of the Asian demand, 34% came from Singapore and 11% from the rest of Asia.

By investor type, banks took 42%, fund managers 33%, retail 21% and other 4%.

Bankers believe the Baa2 rating gave some funds a lot more comfort than a rating one notch into investment grade. They also add that SBI laid the groundwork for its deal very carefully, having canvassed a geographically wide array of investors through one non-deal roadshow in the summer via Citigroup and a second one about a month ago via HSBC.

The bank also recently released its 2Q05 figures. Net income was up 40% year-on-year, versus an industry average increase of 7% to 13%. Analysts attribute this to an expansion of its Net Interest Margin, which went up 68bp to 3.31%.

SBI is currently three times larger than its nearest rival with 9,000 branches and 30% of Indian banking assets. Prior to the creation of the RBI, it was also the central bank.

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