SBI receives approval to raise $2.5 billion via foreign currency bonds

At a time when both spreads and US treasury yields are contracting, the country’s largest lender State Bank of India (SBI) indicated it received approval to raise up to $2.5 billion via issue of foreign currency bonds in fiscal 2020.

It is not yet clear as to what time the bank will hit the market with its issue. However, what is noteworthy is the fact that fund-raising costs have come down significantly in the dollar bond market.

SBI had raised $1.25 billion in January this year through two different tranches of dollar notes having tenors of three and five years, respectively.

It is noteworthy that the spread on SBI’s notes have shrunk significantly since the time of the issue. Bloomberg data indicate that the five-year notes were issued at a spread of 185 basis points over the five year Treasury in January.

According to latest data, the bonds were being traded at a spread of about 152 basis points – indicating a reduction of 33 basis points in four months.

“If the bank does a dollar-bond issue in recent times, it is likely to get an attractive price. A fresh bond issue will be priced close to where the bank’s bonds are getting traded in the secondary market along with some new-issue premium that may range at about 3-5 basis points,” said a banker. This means, if the bank tries to price the issue in recent times, it may receive a spread of close to 155 bps over the five-year US Treasury yield.

Add to this is the fact that US Treasury rates have also been falling since January. The 10-year US Treasury yield, which was ranging close to 2.78% in January, has come down to 2.54% as on April 24 – having seen a 24 basis points reduction. Similarly, the five-year US Treasury yield has seen a fall of 29 basis points since January and is trading at 2.33% as on April 24.

If SBI issues a five-year dollar bond, it is likely to get a coupon close to 3.88%, that is way lower than the 4.375% it had to shell-out in January for a similar tenor bond. As a result, a drop in the benchmark yield along with a shrinkage of spread may allow Indian borrowers to significantly reduce their borrowing cost in the dollar market.

Ananth Narayan, professor-finance at SPJIMR, said that over the last few months, with the Federal Reserve and other major central banks having turned dovish, risk assets have performed well. “As a result, credit spreads on investment grade bonds — particularly of Asian issuers — have compressed across the board. Combined with lower US treasury yields, this presents a good opportunity for good quality issuers such as State Bank of India,” he said.