Korea’s youngest policy bank, Korea Finance Corporation (KoFC), debuted in the international bond markets early Thursday morning with the pricing of a $750 million six-year bond. The notes, which were issued under its $10 billion medium-term note programme, were well received by a market that had been anticipating a deal since the borrower went on the road in May.
The senior unsecured notes pay a 3.25% fixed-rate coupon. They were reoffered at 99.867 to yield 3.273%. This was equivalent to a spread of 182.5bp over the five-year US Treasury yield, or 134bp on a mid-swaps basis. The maturity date has been set to September 20, 2016.
In a sector that has been dominated by five-and-a-half-year maturities, the six-year deal made sense to the lead managers (Barclays Capital, BNP Paribas, Citi, Credit Suisse, Korea Development Bank) as well as the borrower.
“The six-year is just an extension of the idea of going for a five-and-a-half-year,” said one banker. “The idea behind all of this is that you don’t need to pay as many basis points that the curve dictates,” he added.
Indeed, Bong Sik Choi, a member of KoFC's board of executive directors, said the decision to make it a six-year maturity was made to take advantage of the very steep swap curve between five and six years.
Meanwhile, investors were demanding that KoFC come to market with a longer-dated issue than what was being supplied to the market by other issuers. However, anything above the six-year mark did not match KoFC’s existing assets, explained Choi.
“This was the longest we could go,” added Na Young Kim, manager of the global funding team at KoFC.
The lead managers also wanted to distinguish the credit from KDB, which recently issued a 5.5-year bond due in March 1016. KoFC was spun off from KDB in October last year as part of the process to privatise the latter. It acts as the holding company of KDB Financial Group, which in turn controls KDB, KDB Capital, KDB Asset Management, and Daewoo Securities.
The bonds were issued without an explicit guarantee but as a 100% government-owned entity and the only wholly owned quasi-sovereign issuer among the Korean policy banks, a guarantee was implicitly implied via the ownership structure.
Pricing was aggressive from the outset. Choi said the target had always been to price just inside of the recent KDB 2016 issue, which at the time of the KoFC pricing was trading at Treasuries plus 181bp. This was equivalent to a spread over mid-swaps of 150bp. In the end though, the pricing of the new KoFC 2016 bonds at mid-swaps plus 134bp resulted in a 16bp difference between the two credits.
To give an indication of how aggressive the lead managers were, guidance was released late Wednesday morning in Hong Kong for a yield of Treasuries plus 195bp. Late Wednesday evening that was revised to 187.5bp.
"On a working level it was the pen stroke on our yield curve, because that will later determine our curve," said Kim. "The spread level for this transaction is likely to form investors' expectations for our future transactions for all the maturities across the yield curve," she added.
Investors didn't necessarily share this view, however. As one source familiar with deal noted, “It’s cheapened up in the secondary, which is not necessarily surprising. Pricing was pretty punchy versus the outstanding KDB and Kexim 2015 (Export-Import Bank of Korea) deals, [so] its no surprise that the market was a little bit wary to buy the credit in the secondary.”
When Asian trading opened yesterday, the yield spread over Treasuries quickly widened by 10bp.
“Apparently a lot of the selling has been in the 188bp to 192bp range,” said a rival banker. “And buyers are sitting around 195bp,” he added.
However, despite the poor performance in the morning, by late afternoon yesterday the bonds had bounced back from the initial sell-off to a level of 187bp. Although slightly wider from where they came to market, this should be seen in the context of a softer market with the Korea policy bank sector overall having widened by 3bp.
The deal was 5.3 times subscribed, prompting speculation that the allocation may not have been “great”. However, with a final order book of $4 billion from 260 accounts, both the borrower and lead arrangers were satisfied with the bookbuilding process.
With final guidance of 187bp, not all investors were comfortable with the final pricing being as tight as 182.5bp, however, and thus opted out of the sale. However, as one banker said, “some guys were priced out and for the remainder of accounts left in the deal it was a reasonably straightforward allocation process”.
In the end, fund managers received 43% of the bonds, banks were allocated 26%, private banks 14%, public investors 13% and insurance-type accounts 4%. Asian investors received 57% of allocation, the US got 24% and Europe 19%.
When KoFC set off on its non-deal investor roadshow back in May, the borrower and lead managers viewed it as crucial to educate investors about its distinction from KDB and to get them to view the entity as a single-A stand-alone credit. All government assets owned by KDB have been transferred to KoFC. And, by the time the deal was announced, KoFC was confident that investors were clear about the credit story behind the newly formed policy bank.
"Credit-wise we didn’t have much problem,” said Choi. “The main concern was trying to find out how we set our pricing against KDB, Kexim and other quasi-sovereign credits. But we recognised that after Korea Hydro and Nuclear Power Company came to market last week, the momentum was very good for Korean quasi-sovereign credits and the market appetite was there,” he added.
With momentum expected to remain in the market, more quasi-sovereign and corporate borrowers from Korea and India are expected to print. And, on the back of the recent sovereign notes issued by the Philippines, investors can expect news of a Philippine corporate to hit the market in the coming weeks, bankers say.
