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Emerging Markets

Axis pulls bond sale amid Asia credit market jitters

India’s Axis Bank scrapped plans to sell dollar bonds this week as rising global credit spreads and profit taking in emerging markets shut the door on new issues in Asia.

Axis completed a roadshow in London on Wednesday via Barclays Capital, HSBC, JPMorgan and Standard Chartered. The Baa2/BBB- rated bank announced earlier this week that a benchmark-sized dollar Reg S senior bond would be issued, pending roadshow feedback.

However it returned to Mumbai empty-handed on Thursday after weaker than expected US consumer confidence data released on Tuesday triggered a wave of profit-taking in emerging markets and forced credit spreads wider - just before the rally today triggered by the news that the US recession officially ended in the third quarter of the year.

There were high hopes this week that Axis would issue a competitively priced deal, after a blowout trade from State Bank of India on October 19. The borrower sold $750m of five year bonds after receiving orders worth $5bn from 250 accounts.

The SBI bonds due 2012 were priced at 190bp over mid-swaps, or 226.4bp over Treasuries, coming at a re-offer price of 99.779 and a coupon of 4.5%. That was at the tight end of guidance of 190bp-200bp, tightened from an initial range of 200bp-215bp over swaps.

SBI is "now clearly the new reference point for all Indian bank issuers" said a bookrunner on the Axis transaction this week. However, credit spreads for the 2012 bond widened from 230bp over Treasuries on Tuesday, 237bp on Wednesday to 247bp by the end of Thursday — some 20bp wide of its spread at re-offer.

"The 17bp widening of credit spreads for SBI this week alone means investors don’t want to buy new Indian bank issues and if they did, the premium would have been unacceptable to the borrower," said a banker on the Axis deal on Thursday. "It would have been absolutely the wrong thing to have done the deal today anyway as it would have got crushed in the aftermarket."

Another banker close to the issuer said: "Axis Bank is not desperate for cash, it will monitor the market and issue if the price is right." Axis finances itself from domestic sources. The proceeds of the debt sale would have been used to finance foreign currency lending for Indian corporates in overseas markets. However this business is unlikely to have enough demand in the near-term to justify an expensive dollar bond issue, said an Indian bank analyst in Mumbai.

The widening SBI credit spreads this week mirrored the selloff in Asian credit markets and global equities. In addition, Perusahaan Listrik Negara, Indonesia’s state-owned electricity distribution utility, looked likely to postpone a dollar bond until next week at the earliest (see separate story). Mexichem, a Mexican chemicals maker, pulled a deal after completing a roadshow in Asia this week via Bank of America Merrill Lynch.

Wait-and-see approach

The surge in new deals over the past two weeks has contributed to investor fatigue. "The market has been swamped with new deals and there is always a danger that investors don’t have enough time to do all the necessary credit work," said Claudia Calich, senior emerging markets portfolio manager at Invesco in New York.

Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong, said there had been a drop in risk appetite, and that markets by region and asset class were highly correlated. "It is understandable for investors to lock in some profits after massive rallies since March," he said.

Nevertheless, bankers say the strong demand for Indonesian high yield bonds this week highlights the market’s ability to support the "right credit for the right price," said an Asian debt capital markets banker in Singapore.

"There is a lot of cash still on the sidelines. But I think a lot of Asian borrowers will choose to be more selective and adopt more of a wait-and-see approach," he said. In addition, news that the US economy grew 3.5% year-on-year in the third quarter has ignited optimism for the global economy.

Nevertheless, market developments this week highlight the stubborn correlation between global equities and Asian credit spreads. Given the intra-day volatility of global bourses, leads now face greater execution hurdles for new deals if this trend strengthens. In addition, company earnings for the third quarter are due soon while the US Federal Reserve Open Markets Committee (FOMC) will stage a two-day interest rate policy meeting next week. This busy calendar, combined with investor profit-taking, highlights the hurdles in issuing new deals before year-end, and any window for new issues may not stay open for long.

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