Banks draw line in the sand with Sterlite

Fri Jun 15, 2012 7:11am EDT

SINGAPORE, June 15 (IFR) - Sterlite Industries (India), majority owned by London-listed Vedanta Resources, found itself playing a tug-of-war with banks this week - and losing. The company could not get the price it wanted from the arrangers of a local bond, and ultimately, it stubbornly withdrew the transaction rather than pay up.

But the flopped deal is being seen by bankers as a pyrrhic victory and a bellwether of change in local market dynamics, after a period of almost total inertia in the market in the wake of intense policy action prompted by a bout of volatility in the currency.

In India, banks generally underwrite bonds at a specific price, expecting to sell the securities in the secondary market for profit at a later date. That system, though, turned against lenders in April, when deals by Hindalco and other blue-chips turned into losses. Market conditions forced banks to hold positions on their books longer than expected or sell at a steep loss.

Hindalco, which Sterlite was referencing for its new bond, was especially painful for banks. The company got banks to underwrite its deal at 9.55% at the end of April, but when lenders tried to unload bonds in the secondary market, investors demanded yields 10bp wider.

"The company was expecting a rate closer to its peer Hindalco Industries, which priced its 10-year bonds at 9.55% in April," said a banker. Both Sterlite and the non-ferrous metal producer Hindalco are rated AA+.

"In the Indian (corporate) bond market, price is king," said a veteran Indian banker. "This is the flaw of the system as no weight is given to liquidity, let alone the appetite of investors towards a credit."

ENOUGH IS ENOUGH

So, when Sterlite came requesting tight pricing, in line with the last blue-chip deals done in April, banks drew a line in the sand. The levels offered for the intended Rs24bn (US$439m) two-part bond came much higher than anticipated. So high, in fact, that Sterlite opted to scrap the fundraising entirely.

Axis Bank, ICICI Bank, HDFC Bank, Kotak Mahindra Bank, Standard Chartered and Yes Bank offered bids at 9.90%, while IDFC bid at 9.80% and Barclays at 9.70%.

If banks took a stand, so did the company. "Generally, in such a situation, an issuer (needing funds urgently) will accept the lowest bid and will ask others to match the lowest offer, but Sterlite backed out completely," said another banker closer to the deal.

For Sterlite, a U-turn was the easier option. A rate cut expected at a June 18 central bank meeting could give the issuer a chance to get its desired pricing, once corporate yields adjust.

In the interim, Sterlite is visiting the commercial paper market to repay maturing debt. But that defeats the purpose of India's largest diversified metals and mining company attempting a three and a five-year bond - to extend the maturity of its various CP, maturing June 18-22. That will have to wait.

TIME TO CHANGE THE RECORD

The Indian corporate market is not new to price-sensitive issuers, some seeking margins 10bp-20bp tighter than what final investors would tolerate. Underwriters often oblige unrealistic borrowers for various reasons. In the recent past, issuers have even been able dictate terms of their bonds and bar underwriters that failed to meet them from future deals.

And sometimes banks are simply looking for league-table credit or taking a view on interest rates, betting they can turn a profit on the bonds somewhere down the line. But with the recent movement in the local market shaking up many assumptions, banks seem to have changed that stance.

Some are even calling for government intervention to make the market less dysfunctional. "It's high time the regulators look into the pricing of corporate bonds in India," said a banker with a local brokerage. "Some arrangers and issuers are just destroying the market."

While authorities have not stepped in, underwriters seem to have decided to stand their ground. With Sterlite, banks showed they are taking matters into their own hands and imposing price discipline themselves. (Reporting By Archana Narayanan and Manju Dalal; Editing by Julian Baker)

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