Wednesday, 15 August 2018

DCM 2007: Setting the standard

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ICICI Bank has borrowed a staggering US$5.8bn this year from the offshore markets, for the second-largest annual issuance total from an Asian borrower since Hutchison Whampoa broke all records in 2003. Despite the risk of investor fatigue, there can be little doubt that the bank is setting the borrowing standard for corporate India, as Jonathan Rogers reports.

Such has been the frequency of ICICI’s forays into the offshore bond markets over the last 12 months or so that one regional bond trader claimed that the bank was now known in the markets as the “new Philippines” given that it has filled the frequent borrower vacuum created when the Philippines drastically reduced issuance a few years ago.

The bank has borrowed in a range of currencies in the loan and bond markets over the past couple of years, partially in the quest for investor diversification in the hope that it can quickly expedite its ambitious overseas expansion programme.

Bond and loan volumes have increased steadily from ICICI in both the domestic and cross-border markets and in the international syndicated loan markets. According to data from Thomson Financial, the bank raised on average around US$350m per annum from the offshore G3 bond markets between 2003 and 2005, having been absent since the Asian financial crisis of 1998.

Last year this grew to US$1.04bn and has climbed this year to US$5.8bn, with ICICI raising US$2bn in late September in what represented the biggest offshore bond from an Indian entity.

Domestically, the bank raised US$1.7bn-equivalent last year, having borrowed around US$350m-equivalent over the previous two years. Interestingly, the hunger of international investors to book its bonds has meant the bank has raised nothing domestically this year.

Boosting the bank’s offshore funding blitz has been the equal enthusiasm of syndicated lenders to wear ICICI risk. Some US$1.9bn has been raised by ICICI via offshore syndicated loan markets so far this year, with the bank close to exceeding its total for last year of US$2.2bn borrowed, versus an average annual total over the previous three years of US$400m.

ICICI Bank is by a long way India’s biggest overseas borrower and an apt symbol for the country’s heady economic growth, representing as India’s biggest privately-owned bank the foundations of this economic “miracle” by a surging spirit of entrepreneurship in this once-moribund and red tape-clogged democracy.

ICICI started the year auspiciously in January with the largest-ever bond deal in Asia (ex-Australia, ex-Japan), a US$2bn three-tranche 144a issue. Not only was this the first three-tranche international debt deal from an Indian bank, but it also almost exceeded the total US$2.08bn raised by Indian borrowers in the offshore markets last year.

The issue consisted of a cumulative subordinated US$750m Upper Tier 2 15-year non-call note, a US$500m senior three-year FRN and a US$750m senior five-year fixed-rate tranche. A hefty US$8bn book was built, allowing a print at the maximum of the US$1.3bn–$2bn size leads Citi, Deutsche Bank and Merrill Lynch had flagged to investors during global roadshow. Term funding rates were competitive: mid-swaps plus 128bp on the Upper Tier 2 piece, Libor plus 54bp on the floater and mid-swaps plus 75bp on the fixed piece.

Just two months later, the bank borrowed €500m in two-year paper, representing the first euro-denominated public transaction from an Indian borrower and pulling in a three-times covered book. BNP Paribas, Citi, Deutsche Bank and HSBC led the trade.

Barely pausing for breath ICICI brought India’s first sterling-denominated bond in May, a £350m three-year via the same group of leads, which proved popular with investors, allowing the bank to tap it for an extra £50m a month later, the additional bonds coming at Gilts plus 82bp, a basis point inside the original issue spread.

Borrowing at the overseas branch level underscores the fact that much of the bank’s fundraising has been for the purpose of international expansion rather than simply to meet capital adequacy regulations.

Again, to this end, ICICI UK, the bank’s UK subsidiary, issued a US$500m five-year FRN in February via Barclays Capital and Deutsche Bank and again at three-years in the same size in June via Citi, Lehman Brothers and Merrill Lynch.

As if this were not enough ICICI signed a US$1.5bn-equivalent three-tranche yen denominated syndicated loan arranged by 10 international banks in early September which attracted commitments from a further 18 banks in syndication. The deal distinguished itself as India’s largest-ever offshore syndicated FIG loan from an Asian financial institution (ex-Australia, ex-Japan).

Such deals cement the reputation ICICI has built up among bankers in a remarkably short period for innovation and snappy market timing. The process began just last August when it became the first Indian bank to sell hybrid Tier 1 debt internationally, cashing in on the Indian government’s easing of regulations of what constitutes Tier 1 capital with a US$340m non-call 10 perpetual deal, via Morgan Stanley, JPMorgan and Merrill Lynch.

Perhaps its single-most impressive achievement this year was to reopen the offshore Asian public G3 bond markets with its US$2bn five-year senior Reg S/144a Global deal via Deutsche Bank, Goldman Sachs and Merrill Lynch. As well as being the largest offshore transaction from India, it was also Asia’s biggest FIG single- trancher and equals Hutchison Whampoa’s 10-year deal done in late 2003.

Despite criticism from rival bankers that the deal was priced ludicrously cheaply in order to clear primary markets in the wake of their two month-odd closure since the end of July– it came 55bp north of where ICICI’s five-year CDS was trading at the time of pricing – it looked a pretty swashbuckling affair given the widespread nervousness of many players towards global credit.

Critics of the opinion that the transaction was offered too cheaply pointed as clear evidence to the 15bp tightening to 226bp–222bp the paper put in a day after pricing, having opened at around 229bp offered.

“They left way too much on the table, and a tightening like that it would suggest that they should at least have brought it 10bp tighter,” said a rival syndicate banker.

That criticism was probably a tad harsh given new issue FIG premiums versus CDS seen in recent deals that priced just ahead of ICICI in the US and Europe. A US$1bn five-year senior bullet for Iceland’s Glitnir Bank also printed at 55bp back of the issuer’s like-tenor CDS just a week before ICICI came and a week before that Standard Chartered Bank priced a 10-year sub, again at the same spread over its five-year CDS.

And with Glitnir and Standard Chartered rated Aa3/A– and A2/A+ by Moody’s/S&P, respectively, the argument that the new ICICI priced appropriately is supported by the Indian bank’s relatively low Baa2/BBB– ratings at the senior level.

“FIG isn’t exactly flavour of the moment given its location at the heart of the credit crisis and fears that there are more horror stories out there,” said a banker familiar with the ICICI deal. “Deutsche was able to get 10-year funds at Libor plus 18bp before the sub-prime crisis blew up, and it now raises funds at that tenor at plus 85bp. That’s around a four times multiple versus its ‘normal’ funding cost, whereas ICICI came at roughly twice where it raised funds before sub-prime.”

He said that ICICI CDS is not necessarily a perfect comparable by which to judge its cash levels because ICICI CDS is used as a broad macro hedge for India, or even South East Asia, rather than by players taking a view on the bank.

Adopting an ultra-cautious approach to the deal on the back of the prolonged primary market closure amid unusually skittish sentiment, ICICI went on non-deal roadshows in Asia, Europe and the US, with the bank’s funding officials indicating to potential investors in one-on-one meetings that they were eyeing a chunky deal but that the exact timing of any trade could not be assured.

A rival banker suggested that the US leg of the roadshows had produced a handful of bulky anchor orders from a couple of big accounts, mentioning PIMCO and Fidelity as possible candidates to have put in orders in the magnitude of US$500m, adding that the leads had capitulated to the pricing demands of US investors.

A banker involved denied this claim: “ICICI is keen to increase its investor base in the US and it would be true to say that it had focused on getting solid traction for the trade from US accounts. But US anchor orders didn’t drive the deal and, in fact, the book was evenly distributed over the three regions.”

ICICI’s status as the country’s only borrower with access to the 144a market is again evidence of its desire to tap the broadest range of investors and serves as a model of ambition that other Indian borrowers will surely seek to emulate.

As of the end of March, the bank had assets totalling US$79bn and is India’s second-largest bank after State Bank of India, also ranking third among all the companies listed on the Indian stock exchange in terms of free float market capitalisation.

“This has been a watershed year for ICICI and it has rapidly become the torch-bearer for all of the country’s commercial lenders, whether government owned or private. Ultimately, it will seek to dominate the market for cross-border lending to fund corporate India’s aggressive overseas expansion plans,” said a Hong Kong-based syndicate head.

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