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ICICI Bank
About face on non-call &
coercive exchange
„ICICI has now decided to call its UK LT2 bonds
Last week ICICI announced that it did not intend to exercise its upcoming call
option on its FRNs callable 12 July 11 and launched an exchange offer for these
bonds and two other LT2 bonds callable on 1 Aug 2011 and 1 Dec 2011which we
viewed as coercive. However, after discussions with investors, management has
changed its mind and decided to exercise the call option and withdraw the
exchange offer on the other two bonds. While no mention has been made about
calling the other two bonds, we think that this change of heart suggests that they
intend to call these bonds. We would not be surprised to see another exchange
offer launched for the call Aug/Dec ‘11 bonds. However, this time around the
bank is likely to use the carrot approach (i.e. provide an incentive) rather than the
original stick approach (i.e. below par exchange and the implication of non-call).
What was the original rationale for not calling the bonds?
According to management, the context for the Exchange Offer was the evolving
regulatory environment, especially in the Euro-zone (including United Kingdom),
with banks focusing on capital preservation through various capital management
strategies. The Exchange offer was aimed at maintaining the overall subordinated
debt capital position of ICICI Bank UK, which they believe was considered to be in
line with market practice in the region. While banks may be focused on
preserving capital with capital requirements rising under Basel 3, we disagree that
not calling the bonds is considered to be a market wide practice as there are
many banks that have continued to call their bonds. In addition, ICICI UK Bank is
not exactly in want of capital with a CAR of 23% which would fall to 21%, by our
estimates, if they call their LT2 this year.
Upgrading UT2 perps but maintaining UW-30% on the bank
We are upgrading the ICICI 6.375% UT2 perp (call ’16) bonds that we
downgraded last week from UW-70% but will maintain an UW-30% on these and
the rest of ICICI’s bonds (in line with the Indian banking sector). While we think
that the decision by the bank to call its bonds is positive, it will take some time to
gain back investors trust after taking the bondholder unfriendly approach to start.
We do however continue to believe that ICICI’s fundamentals will hold up better
than the state-owned banks given its loan growth control over the last few years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank
About face on non-call &
coercive exchange
„ICICI has now decided to call its UK LT2 bonds
Last week ICICI announced that it did not intend to exercise its upcoming call
option on its FRNs callable 12 July 11 and launched an exchange offer for these
bonds and two other LT2 bonds callable on 1 Aug 2011 and 1 Dec 2011which we
viewed as coercive. However, after discussions with investors, management has
changed its mind and decided to exercise the call option and withdraw the
exchange offer on the other two bonds. While no mention has been made about
calling the other two bonds, we think that this change of heart suggests that they
intend to call these bonds. We would not be surprised to see another exchange
offer launched for the call Aug/Dec ‘11 bonds. However, this time around the
bank is likely to use the carrot approach (i.e. provide an incentive) rather than the
original stick approach (i.e. below par exchange and the implication of non-call).
What was the original rationale for not calling the bonds?
According to management, the context for the Exchange Offer was the evolving
regulatory environment, especially in the Euro-zone (including United Kingdom),
with banks focusing on capital preservation through various capital management
strategies. The Exchange offer was aimed at maintaining the overall subordinated
debt capital position of ICICI Bank UK, which they believe was considered to be in
line with market practice in the region. While banks may be focused on
preserving capital with capital requirements rising under Basel 3, we disagree that
not calling the bonds is considered to be a market wide practice as there are
many banks that have continued to call their bonds. In addition, ICICI UK Bank is
not exactly in want of capital with a CAR of 23% which would fall to 21%, by our
estimates, if they call their LT2 this year.
Upgrading UT2 perps but maintaining UW-30% on the bank
We are upgrading the ICICI 6.375% UT2 perp (call ’16) bonds that we
downgraded last week from UW-70% but will maintain an UW-30% on these and
the rest of ICICI’s bonds (in line with the Indian banking sector). While we think
that the decision by the bank to call its bonds is positive, it will take some time to
gain back investors trust after taking the bondholder unfriendly approach to start.
We do however continue to believe that ICICI’s fundamentals will hold up better
than the state-owned banks given its loan growth control over the last few years.
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