Indian banks raising international bonds at developed market rates

Both ICICI and SBI raise bonds at fine rates despite India's poor rating

Indian banks in the international markets are raising bonds at a finer rate than many financial institutions from other countries rated far superior than India, which has an international rating of BBB-, a notch above junk. 

ICICI Bank Ltd last week raised $300 million through 5.5 year bonds at equivalent maturity US treasury plus 155 basis points. The fixed rate coupon of the bond came at 3.25 per cent. 

State Bank of India (SBI), similarly, priced its bonds too at 3.25 per cent just before ICICI Bank’s issuance. 

These are superfine rates considering they come from a country with a sovereign rating that is just above speculative grade. 

To be sure, rates could be structured in a manner that can effectively mask the rating of the firm itself. For example, by giving higher discount to the face value, the effective coupon could be squeezed even further. In that case, taking the coupon won’t be a right measure. 

In that case, the best gauge is to see the yield in the secondary market of the firm’s bonds in the secondary market. 

ICICI Bank had issued a certain bond at a coupon of more than 6.5 per cent back in 2007. The secondary market yield of that bond is now close to 3.8 per cent, which establishes the fact that ICICI Bank papers are indeed attractive in the eyes of investors. 

Same is the case with State Bank of India bonds in the secondary market. Yields have fallen much below the coupon of these bonds. 

However, for other bonds from India, the rates are sky high. For example, a corporate group with reasonably good finances have raised money at more than 8 per cent, painfully reflecting the effect of the country rating. 

However, this also indicates that international investors are now able to distinguish between good companies and relatively average companies and are willing to price the bonds accordingly. This also indicates that the investors are now not very concerned about the country rating. This is something that rating agencies have to consider going forward. 

“The investors put their money in a company on case by case basis. This is not unusual that a company with a lower rated country gets very good rates because its fundamentals are good,” said Lillian Georgopoulou, fixed income product specialist of the London Stock Exchange. 

Add to that, there is a new confidence in the Indian story. 

“Investors now have confidence in both the country and the currency. The rupee in the past had been quite a volatile currency. With the credible government reforms of the Modi administration, investors have got the confidence to invest even longer term in India.” she said.