Hana Bank, South Korea's fourth biggest lender, raised $1 billion through the sale of three-year government-guaranteed bonds yesterday. It is the first Korean bank to tap the $100 billion debt support programme set up by the government last October.
The bonds pay a coupon of 6.50% and were reoffered at 99.555 for a yield of 6.666%. That translated into a yield spread of 490bp over mid-swaps, or 542.6bp over three-year US Treasury yields.
Initial price talk had indicated at a spread of 530bp over mid-swaps, which tightened to 500bp-525bp during this week's roadshow. As the lead managers prepared to close the books, the range was tightened even further to 495bp-500bp over mid-swaps.
The lead managers for the deal are Barclays Capital, Citi, Credit Suisse, Goldman Sachs, HSBC and ING.
The Reg-S, Rule 144A issue, which was launched out of Hana's global medium-term note programme, attracted orders worth more than $5.75 billion. The intention is to bring as much foreign currency as possible into Korea, so Korean residents couldn't buy the bonds at launch. They can, however, purchase them in the secondary market.
Hana Bank, a subsidiary of the Hana Financial Group, reported net income for the fourth quarter ended December 2008 of W25.7 billion ($19.3 million), down 86.1% from a year earlier.
The Hana bonds are rated A2 (with stable outlook) by Moody's, A- (negative) by Standard & Poor's, and A+ (negative) by Fitch Ratings. Korea's sovereign rating is single A, A2 and A+ respectively. On February 9, Moody's downgraded the foreign currency long-term senior debt credit ratings for all eight Korean domestic banks, citing "the banks' heavy dependence on government support to secure external funding".
Other Korean banks, such as market leaders Kookmin and Shinhan, are expected to follow Hana with similar state-guaranteed deals in order to refinance maturing foreign debt, despite concerns that the quid pro quo of a government guarantee will be greater governmental interference in their activities. The October programme provides state-backing for overseas bond offerings with tenors of up to three years, and banks can use it until June this year, paying a fee of about 70bp a year, according to estimates by analysts at French investment bank Calyon.
Also, any domestic bank that wants to attach the guarantee has to enter into a memorandum of understanding with the government agreeing to use some of the proceeds to supply liquidity and credit to small- and medium-sized companies -- particularly exporters -- and also to low-income households. Korea's Financial Supervisory Service will monitor disbursements and impose penalties, including a potential increase of the cost of the guarantee, if they don't comply.
But despite this intrusion on their autonomy, Korean banks might have little choice but to sign up to the programme in order to access dollar funding as they are competing for the cash of investors who are being offered bank bonds guaranteed by other governments, including the US and Australia.
Although Korea's foreign exchange reserves of about $200 billion are the sixth-biggest in the world, the country's external debt repayable within one year is a whopping $194 billion.
Korea's Ministry of Strategy and Finance (MOSF) issued a statement on March 2 clarifying its external debt position. It pointed out that foreign debt with maturities of less than a year has been falling after hitting a peak in September 2008, and the ratio of that short-term external debt to foreign exchange reserves drops from 96.4% to 77% when debt for foreign currency hedging -- which doesn't redeem -- is excluded.
The MOSF said that "short- and long-term external debt is expected to decrease as external debt for foreign currency hedging reduces due to a contraction in shipbuilding orders and overseas securities investment in the face of the global economic recession". Banks have borrowed about $39 billion to match shipbuilders' selling of US dollar forwards.
Korea has also agreed to $90 billion worth of currency swaps over the past six months with the US, China and Japan, which can be used to support the won and therefore cap the costs of servicing and repaying US dollar debt. It has already tapped $16.35 billion of its swap line with the US.
Hana's transaction occurred against a backdrop of encouraging trade and industrial production data in Korea. Industrial production grew by 6.8% compared to January, which was the biggest monthly gain since September 1987, according to Patrick Bennett, Asia FX and rates strategist at Societe Generale. The year-on-year decline has now improved to -10.3% from -25.5%.
The government forecasts that Korea will record a current account surplus of $13 billion in 2009, and recent figures support those projections. Exports rose in March to their highest level since November, increasing 9.7% from February and 30.4% from January's trough.
Bennett believes that the Chinese fiscal stimulus measures are having spill-over benefits for Korea, which "suggests some cyclical strength". He also points out that "factors are at work which indicate a technical rebound", since part of the collapse in trade in the final quarter of last year was a result of "the freezing up of the financing mechanism for trade". His comments refer to the fact that commercial paper to finance working capital for shipping, and letters of credit to insure freight, were impossible to obtain in the fourth quarter.
Industrial Bank of Korea, a state-controlled policy lender said at the beginning of March that it might raise up to $1 billion from a dollar bond issue. In January, Korea Development Bank and Export-Import Bank of Korea raised $2 billion each from five-year dollar issues. The market is now expecting the sovereign itself to launch an offering -- very likely this month.
