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
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
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
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
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
(Reporting By Archana Narayanan and Manju Dalal; Editing by