Despite the uncertainties and gyrations in international credit markets, it’s still possible for solid Asian borrowers to launch successful bond issues, as Korea East-West Power (KEWP) demonstrated yesterday.
The thermal power generation company, which is indirectly owned by the Korean government, managed to find an opportunity to raise $500 million while markets digested the latest attempt by policymakers to alleviate the European debt crisis.
Last week, Asia investment-grade bond spreads tightened by 6bp, outperforming US and European spreads, which each narrowed by 3bp. KEWP was the first Asian company to take advantage of calmer sentiment, as investors in the US and Hong Kong returned from holidays celebrating independence from the British yoke.
The KEWP notes pay a 2.5% coupon and were re-offered at 99.641 to yield 2.577% to a maturity date of July 16, 2017. That was equivalent to 195bp over the US Treasury five-year benchmark yield.
The joint bookrunners were Bank of America Merrill Lynch, Citi, HSBC, Morgan Stanley and UBS. After a global roadshow last month, they approached investors on Monday morning with an initial price target of 215bp over the Treasury yield. They met a positive response and by early evening had narrowed the spread to between 195bp and 200bp, and then found strong enough support to price at the tight end of the range.
On a comparative basis, KEWP seemed to have achieved quite aggressive terms. Adjusting for the yield curve, it was launched a couple of basis points inside the seasoned five-year issue of another Korean power generation company, Korea Western Power.
The KEWP issue was sold to professional investors in the US under the SEC’s Rule 144a. The total value of the order book exceeded $4.8 billion, made up of 297 accounts. The size had been capped at $500 million, so there was no question of increasing the issue size to meet the strong demand.
Just under half of the paper was bought by Asia-based investors (49%), while 26% was placed into Europe and 25% into the US. Asset managers took 51%, public sector accounts 16%, commercial banks 15%, insurers 10% and private banks 8%.
The senior unsecured notes are rated A1 by Moody’s and a notch lower at single-A by Standard & Poor’s, with both agencies assigning a stable outlook to the credit. S&P noted that its rating of KEWP is the same as its owner, Korea Electric Power, and also reflects the company’s importance to the national electricity supply as well as a reduction in the risk that the government will privatise it in the near future, since abandoning earlier plans in August 2010. On a standalone basis, the agency said KEWP’s rating would be BBB.
KEWP needs “to make significant capital expenditures to meet growing demand for electricity”, said S&P, and it intends to use the proceeds of its bond issue for capital spending as well as refinancing of existing debt.
KEWP is one of six thermal generation companies that were spun off from Kepco in April 2001. As of 31 March 2012, it had an installed generating capacity of 8,816 megawatts, comprising coal-fired units, liquefied natural gas (LNG), oil-fired and others, according to Moody’s.
It can pass most of its fuel cost risk onto Kepco through a cost-based pool system, and its operating cashflow should be enhanced by the commencement of a new LNG-fired plant with a capacity of 948MW in 2014.
Meanwhile, another Korean borrower approached investors yesterday. State-owned Industrial Bank of Korea was in the market for a 144a five-year benchmark deal, and early price guidance was at 200bp over the US Treasury yield. Again, five banks are handling the issue and splitting the fees. The joint-bookrunners are Bank of America Merrill Lynch, Citi, Deutsche Bank, Goldman Sachs and Standard Chartered.
