An interesting point to note here is the movement in the cost of financing from the time when many of these bonds were issued. For example, State Bank of India’s London branch priced a five-year dollar bond in April 2013 at a spread of 255 basis points over the five-year US Treasury yield.
The overseas bond market might see several issuances from Indian banks in 2018, as more than $6 billion of foreign currency bank bonds come up for maturity during the year, and these will likely be refinanced through fresh issuances, say bankers. Bloomberg data shows that of the total bonds coming up for redemption in the year, those worth about $5.35 billion are all large size issues by banks. Of these, bonds issued by ICICI Bank, Indian Overseas Bank, HDFC Bank and IDBI Bank worth $2.5 billion will mature in the first quarter of the calendar. An interesting point to note here is the movement in the cost of financing from the time when many of these bonds were issued. For example, State Bank of India’s London branch priced a five-year dollar bond in April 2013 at a spread of 255 basis points over the five-year US Treasury yield. At that point, the yield was close to 0.7%, resulting in a coupon of 3.25%. In January 2017, when SBI’s London branch issued a similar tenor dollar bond, the five-year US Treasury yield had risen to 1.8%.
However, the spread had compressed to 145 basis points, resulting in a similar coupon. What this implies is that while the treasury yields have trended up, the spreads have tightened. A similar trend has been seen in the case of private sector bank issuances, with the spread on ICICI Bank’s dollar bonds narrowing by over 200 basis points between 2012 and 2017, despite the treasury yield rising by just 130 basis points.
This augurs well for the refinancing plans of banks, even though there remains a risk of a further spike in the US treasury yield as the US Federal Reserve looks to hike interest rates. Other central banks across the world too are reconsidering their easy liquidity stance. A few days back, the bond market received a jolt as reports emerged that China may lower its Treasury bill purchases. If yields continue to rise, banks may find their borrowing costs rise marginally compared to 2017 levels but given the healthy demand for Indian paper, the cost may not be significantly higher. Anant Narayan, professor – finance at SPJIMR supports this contention.”While US Treasury yields have climbed and global growth is robust, Indian names continue to command narrow credit spreads, helped by global asset inflation, rating upgrades and positive sentiment about India’s prospects. I think Indian banks will look to refinance the dollar bonds that mature this year,” he pointed out.
In a recent interview, Neville Fernandes, head of debt capital markets at Citi India opined that he expects the sophisticated bank issuers to issue in size in 2018 and maintain a liquid benchmark. “Those banks who do not want to approach the USD bond market, might consider refinancing from another source like the USD syndicated loan market which continues to be very liquid and attractive as well,” he said. What this clearly implies, is that, the near $6 billion of redemptions of the foreign currency bonds will likely get funded through an alternate foreign currency source–bonds or syndicated loans–leaving the currency market largely unaffected.