Axis Bank became the fourth and largest green bond issuer from the Indian financial sector on Monday, raising $500 million from a debut deal.
The five-year Reg S/144a transaction came into a market preparing itself for a deluge of bonds from issuers of all hues over the coming two weeks. Overshadowing them all is a prospective jumbo transaction from China's Three Gorges Corporation, which could raise more than $3 billion, according to investors.
It is also a market that is still in recovery mode after hawkish minutes from the US Federal Reserve last week pushed Treasuries almost 10bp higher overnight.
As such, Axis Bank took a risk jumping into the market ahead of the pack but could end up benefiting from first mover advantage and the presence of a number of green bond funds from Europe and the US, which other non-green issuers in the pipeline will not be able to tap into.
Bankers described the order book for the Baa3/BBB-/BBB- rated credit as reasonable though not spectacular, peaking at $1.1 billion when price guidance was revised from 175bp to 160bp over Treasuries.
"Indicative guidance was aggressive but it's what you'd expect from an Indian issuer," said one banker. "This deal should trade fine in the secondary market as there's been a lack of supply."
Final pricing was fixed at 99.479% on a coupon of 2.875% to yield 2.988% or 160bp over Treasuries. The transaction was issued through the bank's Dubai International Financial Centre branch.
Fair value was fairly easy to pinpoint given the bank has an existing 3.25% November 2020 bond outstanding. This was trading on a G-spread of 153bp at the time of pricing.
Bankers said the seven-month curve extension was worth about 5bp, which means the new deal has offered a slim 2bp new issue premium.
Bankers said that roughly half the paper went to Asia, while the remaining half was split between Europe and the US. They added that green bond investors accounted for about half the European and US demand.
"Green bond investors don't really exist in Asia yet and it's an area that definitely needs cultivating," said one banker. "But we got the impression that many of the green bond accounts who did come into this deal had already done their credit work looking at previous green bond issuers from India even if they hadn't actually invested in them."
The Axis Bank deal follows issues from Yes Bank, which raised $151 million in February 2015; IDBI, which raised $350 million in March 2015; and India Exim Bank, which also raised $350 million in November 2015.
Green bond framework
Indian issuers have a reputation for taking financial shortcuts where their green bond issues are concerned and fail to pay for an independent second opinion certifying their use of proceeds. However, in its net roadshow Axis Bank said KPMG had certified that its green bond framework complies with the London-based Climate Bond Initiative Standards version 2.0 (a voluntary set of guidelines established by market participants in Europe).
Last week, Deloitte acted in a similar capacity certifying the use or proceeds for Zhejiang Geely's $400 million green bond.
Axis Bank has specified three areas where it will invest the proceeds from its bond: renewable energy (solar, wind and small hydro projects); urban mass transport (electric buses) and low carbon emission buildings.
Under the terms of its green bond framework, the bank’s corporate credit team will nominate green assets to invest in. These will then be vetted and approved by a green bond committee comprising Axis Bank’s heads of Treasury, Asset and Liability Management and Credit Collection.
The bank will also maintain a dedicated register for tracking where its green bond proceeds have been invested. This register will include the ISIN numbers of any bonds it invests in, the loan amounts it has sanctioned and what assets and projects they will be invested in.
Finally, it will also produce an annual sustainability report further outlining its use of proceeds, which will be published on its website.
The bank is India's third largest private sector operator by assets. At the end of the 2016 financial year, it reported a 12% increase in net profits.
It remains well capitalized with an overall capital adequacy ratio of 15.29%. However, in line with the wider Indian sector, non-performing loans are increasing and stood at 1.67% at the end of March compared to 1.34% one year earlier.
Joint bookrunners for the bond deal were Axis Bank (Singapore), Bank of America Merrill Lynch, Credit Agricole, HSBC, JP Morgan and Standard Chartered. BAML also advised the bank on the green bond framework, while HSBC was structuring advisor and Standard Chartered on meeting the Climate Bond Initiative's standards.