US investors back ICICIÆs $2 billion 'monster' bond

Huge bank capital deal is bigger than Indian marketÆs combined 2006 US dollar issuance.
ICICI Bank has closed IndiaÆs biggest ever offshore bond offering, topping the scales at a whopping $2 billion. By the time that the Rule 144A deal priced in New York on Tuesday afternoon it was comfortably above the marketÆs wildest expectations.

The deal was rumoured last week at $1 billion - and that would still have been a noteworthy transaction. However, as ICICI and its bankers started talking to investors in cities around the world, the stars aligned to produce a unique transaction. ôWhat was different about this deal?ö says one banker rhetorically. ôEverything. ItÆs a monster, a totally different animal.ö

Indeed it is. Indian borrowers have typically raised relatively small amounts offshore and only rarely in the US, largely because they can get the pricing they want by borrowing from non-US investors in the Reg-S market, without paying the transaction costs associated with borrowing in the US. Nobody doubted that Indian issuers with a decent story to sell could raise big chunks of cash in the US, but ICICI has demonstrated that they donÆt need to pay over the odds to do so û in fact, ICICI priced close to its rivals while raising more dollar funding than the entire Indian market managed in all of 2006.

With Indian paper such a rarity in the US market û and proper, index-eligible benchmarks almost non-existent û American investors were tripping over themselves to buy ICICI, IndiaÆs largest bank by assets. It is an extraordinary transaction for any bank, but all the more so for a BB+ credit û it was the biggest single-currency bank deal ever and the biggest bank deal of any kind since 2001, which was from AA-rated OCBC. ôYou wonÆt see another deal like this for a very long time,ö says one banker.

The lead banks û Citigroup, Deutsche Bank and Merrill Lynch û successfully persuaded ICICI that a deal of this size needed to be marketed in manageable chunks, including a $500 million three-year floating-rate note that most Indian borrowers would tap the loan markets for. As such, it was important this tranche was competitive with ICICIÆs loan pricing. The two other $750 million tranches comprised a five-year fixed-rate note and a 15-year (non-call 10) tranche of upper tier-two regulatory capital, which is funding required by the Basel accords to ensure that banks have adequate capital reserves.

By the time the banks set initial guidance the deal size had swollen to a range of $1.3-$2 billion and the pricing was already at attractive levels: a spread of 54-55bps over Libor on the three-year, 75bps over mid-swaps on the five-year and 128-129bps on the upper tier-two tranche.

In the end, the three-year floater priced to yield 54bp over Libor; the five-year fixed at 75bp over mid-swaps, or 114.3bp over US treasuries; and the 15-year upper tier-two at 128bp, or 175bp over treasuries.

With ICICIÆs loan pricing at 49bp over Libor, the three-year came in close to the mark and was 4bp through ICICIÆs implied three-year curve. The five-year priced flat to the bankÆs 2011, which works out at 1bp through the five-year curve. The 15-year got the tightest pricing for a new upper tier-two issue from an Indian bank, though slightly outside the current trading levels of Bank of India (126bp) and Canara (125bp).

The two senior tranches are rated Baa2/BB+, and the upper tier-two slice Baa2/BB-, by MoodyÆs and Standard & PoorÆs.

The lead banks more than doubled ICICIÆs previous investor base, attracting a total of 223 accounts and $8 billion of bids ($1.5 billion on the three-year, $2.6 billion on the five-year and $3.85 billion on the upper tier-two). Close to half that demand came from the US, with final allocations skewed in their favour to give a split of 62:17:21 between the US, Asia and Europe on the three-year, 50:27:23 on the five-year and 63:17:20 on the upper tier-two.

Breaking the distribution down by type of account, for the three-year, 69% went to funds, 15% to banks, 9% to insurers, pension funds and central banks, and 7% to corporates and others. For the five-year, 54% went to funds, 19% to banks, 21% to insurers, pension funds and central banks, 2% to retail and 4% to corporates and others. For the upper tier-two 60% went to funds, 8% to banks, 27% to insurers, pension funds and central banks, 3% to retail and 2% to corporates and others.

The legal advisers were Davis Polk & Wardwell for the issuer, and Latham & Watkins and Amarchand & Mangaldas & Suresh A Shroff & Co for the banks. Al Mahmood & ZuÆbi advised on Bahrain legal matters for the senior notes.

With the Republic of the Philippines pricing a sensible deal earlier the same day, the G3 bond markets are off to a neat and tidy start in 2007. Expectations for the year are muted, with most bankers predicting a busier first half and quieter second, with similar overall volumes to 2006.
¬ Haymarket Media Limited. All rights reserved.
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