To augment its Tier II capital State bank of India is coming out with a micro issue of Rs. 500 crores. I am deliberately calling this a micro issue, because there is a huge appetite for such coupon rates (9.2% to 9.5%) from such a great borrower (a AAA rating through the life of the bond is a given).

Why SBI would come out with such a small issue (with the attendant costs) beats me. They could have easily collected more than Rs. 5000 crores with a bond issue like this. Now having given you the background, let me speculate:

– they are testing the waters for a bigger issue.

– they are likely to tap the market at various points in time in the future and treat this like a tap.

– so the next issue could be for Rs. 500 crores, but at 8.5% or at 9.75%

– they are signaling an increasing interest rate scenario so RBI may not have allowed a bigger issue

– they may at the same time issue instructions to accept FDs from senior citizens at 9.25%

Personally if you ask me whether you should invest in a scheme like this, my answer is :Well, it depends.

The issue will be a big hit, ’cause this is like Sovereign debt and the retail application can be a deluge (they need only 10,000 forms for full subscription :)). Allotment is on a first come first serve basis so there will be a rush on day one itself. Including the green shoe they are likely to keep Rs. 1000 crores – so make that 20k forms.

Personally I like liquid debt instruments with a cap gain instead of interest. It is a lovely product even for senior citizens. Most of the ‘retail’ applications will be for Rs. 5 lakhs, and the issue will be oversubscribed on day 1 itself.

Personally I like the issue (though over all my requirement of debt instruments is not too high) so will apply for my mother and wife for sure..but perhaps not much more. I like a bond with a current yield of 9.5% + a possibility of further appreciation. Also at the current index if a few people feel ‘satisfied’ with their equity performance you could shift some money to this nice issue.

I will personally buy it when it lists – maybe paying a higher price and getting a lower yield. However if interest rates change, i may be a loser. I like the Earnings-Price-Ratio of this bond and looks better than the YTM of the bond. What say?