Korean credits continue to shine in the primary markets with the pricing of two well received deals for the Export Import Bank of Korea (Kexim) and Korea East West Power (Kewespo) on Wednesday night. The former was particularly noteworthy as Kexim has been trying hard to narrow the pricing differential with KDB and has now succeeded.
UBS was sole lead manager of a $300 million tap of the A3/A- rated credit's 2009 and 2014 bonds. Pricing was completed on a bookbuilt basis and was aggressive, coming 2bp inside the bid quote for the 2009 bonds and 1bp inside the 2014 bonds.
The group added $150 million of paper to its $500 million 4.25% February 2009 deal. Pricing was completely at 99.145% to yield 4.323%. This equates to 86bp over Treasuries and 48bp over Libor. Fees were 15bp.
The group added $200 million of paper to its $500 million 5.25% February 2014 bond. This was completed at 99.417% to yield 5.326%. This equates to 91bp over Treasuries and 47bp over Libor. Fees were 20bp.
At the time of pricing, the 2009 bonds were quoted at 88bp/83bp and the 2014 bonds at 92bp/88bp. The Libor curve was inverted, allowing the group to raise longer dated funds at a more cost effective price should it choose to swap proceeds.
The most comparable KDB benchmarks are the policy bank's recen 3.875% March 2009 bond and its 5.75% September 2103 bond. The former was trading at 88bp over Treasuries, or 49bp over Libor, meaning that Kexim has priced 1bp inside of KDB on a Libor basis.
For the longer-dated bond, investors would be more focused on the Treasury differential and here the curve is worth about 6bp. Given that KDB was trading at 88bp over Treasuries and 52bp over Libor, this means Kexim has priced 3bp inside of KDB on a Treasuries basis.
Observers say one of the primary reasons for a tap rather than the launch of a new deal was because it would be easier to price inside KDB. Says one, "The trading levels are already out there, whereas with a new deal there would have to be lots more discussion with investors about where Kexim should come relative to the KDB curve."
Sung-Uk Hung, director general of the international funding department at Kexim is, not surprisingly, extremely happy with the result. He comments, "I was thinking about two options: a new bond deal or a re-opening. Every day I've been monitoring the performance of the February bond deal. Spreads on both tranches have just go tighter and tighter and once they started trading inside KDB, I thought it might be an opportune time to re-open the deal."
And he adds, "We only wanted to raise $300 million so it also made more sense to make the existing deal more liquid rather than bringing out a new bond."
Throughout the process, he says the most important factor was timing and this dictated the choice of only one lead manager. "Usually we have two to three banks lead our deals," he explains. "However this time, we really wanted quick execution. We didn't want a whole host of banks with slightly different strategies trying to co-ordinate syndication with each other. We also wanted to catch the market while it's strong. Korean spreads have come right in and you often find that a period of rapid tightening is followed by an adjustment."
A bookbuilt deal was also important for Kexim. "I'm not keen on bought deals," he concludes. "We wanted a pure market driven deal as this achieves the best result."
Distribution figures show that 26 accounts participated in the 2009 tap, which closed at just over $200 million and 34 in the 2014 tap, which closed at just over $300 million. Some 45 different accounts participated overall and about 80% were also in the original February deal.
By geography, 44% of the 2009 tap came from Asia, 35% from Korea, 12% from Europe and 9% from the US. In the 2014 tap, 38% came from Asia, 31% from Korea, 23% from the US and 8% from Europe.
The deal was not priced until early New York afternoon on Wednesday because the lead decided to wait until the market settled after the release of the latest CPI figures.
Non syndicate bankers say the deal made a lot of sense for both investors and Kexim. "Investors are looking at all-in returns. They've seen Treasury yields spike 50bp to 60bp this week and believe the market may have overreacted and want to lock in higher yields while they can. But from Kexim's perspective, swap spreads have remained quite stable, so the borrower can still get very attractive Libor funding levels."
The second deal, which priced yesterday, comprised a $200 million issue for Keswespo led by Barclays, Credit Suisse First Boston and Samsung Securities. The seven-year deal was priced at 98.927% on a coupon of 4.875% to yield 5.059%, equating to 112bp over Treasuries, or 69bp over Libor. Fees totaled 25bp.
Like many recent Korean deals, the 144a offering accumulated a huge order book and pricing was extremely aggressive in relation to the existing genco curve. Most of the genco deals of 2003 proved a hard slog and like the bank deals for Korea First and Hana bank earlier this year, the latest offering may prove to be the one that drags the whole curve in.
Existing comparables are the January 2008 deal for Kowepco, the March 2008 deal for Kospo and the May 2013 del for Kospeco. At the time of pricing, these were respectively trading at 74bp over Libor, 77bp and 82bp.
On this basis, a new seven-year should theoretically have been priced around the 80bp level. Observers say the reason it came over 10bp tighter can be attributed to its 144a language and the much wider investor base it captured.
The final order book amounted to $2 billion and pricing was accelerated by two days. Final allocations saw paper distributed to 130 accounts with a geographical split of 50% Asia, 38% US and 12% Europe. About 14% was placed in Korea.
By investor type, funds took 42%, insurance companies 33%, banks 23% and retail 2%.
Kewespo has been something of a pacesetter among genco credits. It was the first to access the Samurai market and has been the first to broaden distribution away from the Reg S market. It also benefits from the fact that the whole sector has been upgraded since the 2003 deals and it now ranks at the A3/A- sovereign ceiling.
