HONG KONG, March 1 (IFR) - Axis Bank last week became the first Indian bank to sell dollar bonds since May. But while some said that the 5.5-year Reg S deal reopened the market for the sector as it priced tighter than initial guidance, others said the fallout from a large concession complicated issuance plans of other lenders from the subcontinent.
The debate centered around the new issue premium offered by Axis in its deal, which most in the market calculated to be in the 25bp-30bp area. The generous terms spilled over in to the outstanding bonds of other Indian banks, which widened by as much as 20bp after the deal.
This means that after Axis, the usually price-sensitive Indian financial sector issuers would have to pay much more for a new bond.
Axis, India’s third biggest private lender sold its US$500m September 2017 issue at a spread of 440p over US Treasuries last Monday evening. The curve-adjusted spread on the bank’s outstanding 2016s was in the plus 400bp area.
Assuming 10bp-15bp for the additional half-year in the maturity of the bond would translate into fair value at 25bp-30bp inside the final spread.
That was still 10bp inside the initial guidance of 450bp, but bankers away from the deal speculated Axis was actually gunning for a much tighter transaction. And, sure enough, with such a premium, Axis garnered a strong US$1.75bn book.
But people away from the deal did not see the oversubscription being reflective of demand for Indian financial sector credits considering the premium offered. “It demonstrates that the demand for Indian paper is underwhelming now,” said a rival banker.
Axis priced the 5.125% coupon bearing bond at 99.442 for a yield of 5.243%. Axis is rated Baa2/BBB-/BBB-. Barclays Capital, Citigroup, HSBC, JP Morgan and Standard Chartered were the joint bookrunners.
The premium offered by Axis may have to be paid by other Indian lenders taking this route but some are betting it would not deter them as bank liquidity has dried up and the Indian financial sector faces a wall of refinancing ahead.
According to Thomson Reuters data Indian banks have an aggregate of US$3bn coming up for redemption in 2012.
The last five-year loan from an Indian bank was a US$225m facility for IDBI Bank in January 2010. That loan paid a top-level all-in of 235bp over Libor and yet saw only three banks joining the three leads in general syndication.
IDBI was also the most recent Indian FI name to take a three-year loan. In December, it clubbed a US$175m dual-tranche loan paying an all-in of 310bp over Libor. That was almost twice as much as the 160bp all-in paid on the three-year tranche of a US$290m loan transacted in October. Axis paid the same pricing on a US$300m three-year loan in March 2011 - the last time the bank took a loan.
The natural conclusion for Axis’s generosity with its bonds is that the overall cost of funding for Indian banks has spiked after Europeans - which were their biggest counterparts - pulled out of the long-term bilateral market.
At 440bp over treasuries, Axis’s deal could be swapped roughly into 400bp over Libor. So even if the bank could get five-year money in the bank market it would have had to pay more than that. Two weeks ago private sector ICICI Bank priced a US$160m one-year private placement at 200bp over Libor.
“I think other Indian banks will definitely be encouraged to tap the market after the success of the Axis Bank deal,” said Guy Stear, credit strategist with Societe Generale. He added that there should be investor interest in them, too, especially at the current levels. “Indian banks are high beta plays and so attractive for investors in investment grade who want to increase the beta of their portfolios,” he said.
In any case, financial paper from the subcontinent has tightened since the end of 2011 with ICICI 2016s now trading around 410bp over treasuries compared with over 500bp. (Reporting Umesh Desai and Prakash Chakravarti)