Woori Bank, a unit of Woori Finance Holdings, sold $800 million of Rule 144A notes on Monday, pricing the 5.5-year deal at midday in New York. The deal attracted huge demand from investors worldwide, but also controversy, critics complained that the terms were too generous.
The issue was drawn from the bank's $7 billion global medium-term note programme, which is rated A2 by Moody's, but a notch lower by both Standard and Poor's and Fitch which assigned credit ratings of A-. Bank of America Merrill Lynch, HSBC, Morgan Stanley, Nomura, and RBS were the joint bookrunners for the sale.
The bonds pay a semi-annual coupon of 7%, and were re-offered at 99.578 to yield 7.094% to a maturity date of February 2, 2015. The initial price whisper at the end of last week was for a launch spread of 475bp over the benchmark US Treasury yield. That narrowed to a firm range of 450bp-475bp on Monday. The final terms priced the deal at a spread of 450bp over the yield of the five-year Treasury note and 384bp over 3-month Libor.
The issue was launched at a spread of about 390bp over mid-swaps. Cheerleaders for the transaction said this gave investors a small new issue premium of around 15bp. This was on top of an additional 15bp-20bp spread necessary to compensate for the longer maturity compared with Shinhan Bank's $500 million three-year deal which was launched in June. Now, that assumes that Shinhan's bonds were bid at about 360bp over mid-swaps -- so not too far away from the spread on Woori's deal.
And there lies the dispute. The deal's detractors said that Shinhan's spread was actually much tighter -- more like 335bp at New York's opening on Monday. So, by their reasoning, Woori's issue gave investors a gift of up to 40bp -- which was normal for Korean issuers at the beginning of the year, but certainly profligate in today's market when demand is far exceeding the supply of solid Asian credits.
Hence, critics said that the deal was priced too cheaply, and marked a sad end to a two-week period when Korean borrowers, such as the country's state-owned gas (Kogas), power generation (Kepco) and oil (KNOC) companies have driven and been carried by a wave of momentum that has brought the whole of the Korean cash curve tighter.
But the disagreement is hard to resolve. Just a small difference in the price used for the short duration Shinhan bond -- and there are several price providers -- would result in a significant variation in yield, which would of course have meant a wide disparity in the spread over mid-swaps.
Perhaps the clearest judgment came from the market. At the opening in Hong Kong on Monday, the Woori notes tightened immediately by 50bp, and by mid-afternoon when London opened, the two-way quote was 393bp-385bp over the US Treasury yield -- compared with the re-offer spread of 450bp. Investors allocated bonds in the primary market must certainly have felt they had spent their money wisely.
The issue was more than 10 times subscribed, attracting a total order book of $8.3 billion. About 350 accounts were eventually allocated bonds, reflecting strong demand from retail investors, who took up 28% of the issue. Fund managers bought 51%, while 13% was distributed to commercial banks, 6% to insurance companies and 3% to "others".
The majority of the paper was placed in Asia, with those retail investors accounting for a significant part of the 56% distributed in the region, while US and European investors bought 26% and 18% respectively. According to sources familiar with the transaction, the issue offered little value to onshore Korean investors after the cross-currency swap.
The issue is non-callable, so there will be no similar future drama about Woori bucking market convention by failing to call the notes early which, much to the dismay of investors and other market participants, it did in March by not exercising its call option on $400 million of subordinated bonds.
The notes were not issued under the Korean government's guarantee programme for external debt, which was announced on October 19, 2008. This might well have been because the government is Woori Financial Group's biggest shareholder through the Korean Deposit Insurance Corporation.
In a report published on July 27, Moody's analyst Youngil Choi said that the A2 rating "reflects Woori Bank's systemic significance as Korea's second largest bank, given its substantial 15% share of system deposits". Woori Bank had assets of W239.6 trillion ($1.93 billion) as of March 2009, and is especially strong in the small- and medium-sized enterprise and household sectors.
Nevertheless, Woori's core recurring earnings have been under pressure since the end of 2007, as its net interest margin has narrowed -- but in a similar fashion to its rival Korean lenders in light of the economic downturn.
And, Choi added, "Moody's believes that the probability of support by the Korean government in a systemic crisis would be very high".
