Banks are waiting for rates to soften further before reviving their foreign currency bond programmes, although credit spreads for large Indian lenders have eased by as much as 35-40 basis points (bps) in recent weeks.
Banks are being particularly cautious to avoid a repeat of last month’s episode, when Bank of Baroda pulled the plug on its $ 500 million (Rs 2,300 crore) medium term note (MTN) issue, even after offers from overseas investors had come in.
“We are not looking to do an issue right away. Our desired spread is about 200 bps over the mid-swap rate and prices have not eased to that extent,” said a senior Bank of Baroda executive.
HSBC, Citi, Barclays and Standard Chartered Bank are managing the issue.
An MTN programme allows an issuer to raise funds on an ongoing basis through various products such as floating rate notes or on a fixed rate, after obtaining prior regulatory and other approvals.
Investment bankers said no foreign currency bond issues by banks were likely to happen for some months. “At this point of time, a spread of 200 bps is unrealistic. Banks might have to wait a couple of months for such a rate,” said an investment banker associated with Bank of Baroda’s issue.
“In any case, if banks don’t print paper in March, they will close their books for the year. So, we will not see an issue for the next tqo-three months,” he added.
In late January this year, fears that Greece, Portugal and Spain might default on their sovereign debt spooked investors and derailed the MTN plans of Bank of Baroda and Bank of India. Since then, risk appetite has returned and spreads have eased considerably.
Credit Default Swap (CDS) spreads of the five-year secured debt of the country’s largest lender, State Bank of India (SBI), eased to 135.61 bps yesterday on March 16, after touching a six-month high of 170.50 bps on March 1, according to Bloomberg data sourced from CMA New York.
For ICICI Bank, CDS spreads fell to 179.23 bps yesterday after touching a three-month high of 217.85 bps on February 9.
The CDS spread reflects the cost of insuring an underlying security against default and is used to gauge an entity’s credit risk.
Foreign-currency-denominated bonds are priced at a credit spread over an internationally accepted benchmark such as the London Interbank Offered Rate (Libor) or the mid-swap rate.
However, the fall in spreads has failed to move banks waiting to do MTN issues. “Spreads have come down to 225-230 bps after touching a high of 250-260. But, we want to wait for a price around 200,” said a senior executive from public sector lender Bank of India.
“There are still a lot uncertainties and after last month’s episode, when two banks had to shelve their issues, we want to be cautious,” said a senior Union Bank of India executive. The bank had planned to raise up to $500 million through an issue this month.
The only two Indian lenders to have issued foreign currency bonds in the past six months are SBI and ICICI Bank, which each raised $750 million (Rs 3,406 crore). While SBI’s bonds were priced at 190 bps over Libor, ICICI Bank’s bonds had a spread of 292 bps.
