In the hope of taking advantage of strengthening credit markets and the opening of a new issuance window, Korea First Bank (KFB) and the Korea Development Bank (KDB) launched two international bond deals yesterday (Monday).
KDB should price first as it has forsaken roadshows for an accelerated bookbuild and will either price Tuesday, or Wednesday at the latest. With ABN AMRO, Citigroup and Deutsche Bank as lead managers, it has set off with a base deal size of $500 million, although the A-/A3 rated credit has always said it would ideally like to raise up to $1 billion.
Indicative pricing for the five-year deal has been set at 95bp to 100bp over Treasuries, a level that seems fair relative to the current secondary market trading level of Kexim's recent five-year offering. Kexim normally trades at a 6bp to 10bp premium to KDB and its 5.25% February 2009 bond was quoted yesterday at 102bp over Treasuries or 60bp over Libor.
During the course of Asia's trading day, bankers say the deal tightened a couple of points despite softness in US high grade markets on Friday. "The US market was quite soft on Friday because of a sell-off in Treasuries and EM volatility," says one. "Asian traders marked their levels out 2bp to 3bp in the morning and Kexim opened at 104bp. However, it traded in to 102bp."
Behind KDB, roadshows were launched yesterday for a $200 million hybrid tier 1 issue by KFB. This deal also has a more accelerated timetable than initially envisaged and following presentations in Hong Kong yesterday, the team moves to Singapore today, then straight to the US, where pricing may take place as early as Thursday. Plans to roadshow the deal in London have been dropped in order to bring forward pricing and a catch a good market tone.
The deal is being led by KFB house banks, Lehman Brothers and UBS. Together the two led KFB's last upper tier 2 deal in March 2003, while UBS sole led its lower tier 2 deal in October.
As a result of these two deals, KFB became full on tier 2 debt and turned to hybrid tier 1 as a cheaper form of funding than common equity. The chief advantage of a hybrid deal over pure tier 1 equity is that hybrids are tax deductible, do not dilute equity investors, or depress ROE.
However, the structure has to have some form of permanence to count as equity. Hence the Korean regulator's adoption of extendable 30-year deals, callable in year 10, has not been universally applauded since the structure waters down the concept of what is supposed to be a perpetual bond.
To date, Hana Bank is the only Korean bank to have completed an offshore hybrid deal, although both Kookmin and Korea Exchange Bank laid plans to follow suit in early 2003 before volatile markets got in their way.
Hana's deal has a more standard perpetual non-call 10 structure than the extendible 30-year KFB is using. The former completed a $200 million deal in December 2002 with a coupon of 8.748% to yield 450bp over Treasuries or 405bp over Libor. The deal had a difficult passage to market, coming late in the year when investors were tired and unenthusiastic about embracing a new structure.
Today the deal trades on a yield of about 6.75%, equating to about 260bp over Treasuries, or 262bp over Libor. Hana and KFB have very similar ratings, with a one notch differential on the S&P side in Hana's favour.
KFB has a Baa2/BBB- credit rating for senior debt implying a Ba1/BB rating for hybrids, which are normally rated two notches lower. However, Fitch rates the bank BBB+ at the senior level and has assigned the new hybrid deal a BBB- rating, which will be crucial since it needs one investment grade rating to be placed with domestic insurance companies.
KFB's two subordinated debt issues of 2003 provide the most relevant pricing benchmarks. Despite the structural subordination between the two, they are both trading round 5.50% yield, equating to a Treasury spread of 240bp to 245bp over and a Libor spread of 220bp to 230bp over.
Investors would normally expect a yield pick-up of at least 50bp between a undated upper tier 2 and hybrid deal, or up to 100bp if the upper tier 2 deal is dated and the hybrid is not. In this instance, both issues are effectively dated implying a pick-up somewhere between the two.
The bank's rationale for the issue is primarily to bolster capital in support of future growth. At the end of 2003, the bank reported an overall CAR of 12% up from 11.55% a year previously. Tier 1, however, dropped from 7.31% to 6.18%.
But, the possibility that KFB will make a bid for LG Card cannot be completely ruled out and analysts have previously said this would require an additional Won800 billion ($680 million) in capital.
Since Newbridge purchased KFB in 2000, it has won many plaudits for turning the bank from a corporate to retail lending focus. For investors, the main credit issue now surrounds the uncertainty of the bank's future direction. Primarily this boils down to whether Newbridge will follow Carlyle's lead and sell out of KFB, or whether it will continue to grow the bank's asset base.
Over the past couple of months, senior management have indicated their preference for the latter and have said they would like to acquire LG Card's performing assets to expand KFB's retail franchise further. The bank is currently Korea's ninth largest bank by assets (behind Koram and KEB) and needs to grow to avoid being squeezed by its larger rivals.
Analysts have consistently highlighted the bank's strong credit ratios. As of December 2003, the bank had an NPL ratio of 1.53% and loan loss coverage ratio of 101.8%. It was not heavily exposed to the credit card sector (2.8% of total loans), but did aggressively provision for the delinquent cards it did have (one-third of total provisions).
Finally IBK mandated a lower tier 2 deal late last week. Credit Suisse First Boston, HSBC and UBS are believed to have won the books for a $250 million deal that should launch in a couple of weeks. While it is rare to see a subordinated debt issue from a policy bank, IBK is a relatively unusual policy bank since it has a more commercial focus than most global policy banks, is listed on the Korea Stock Exchange and has the fourth largest branch network in the country.
Part of the rationale for a new deal is to strengthen capital after higher-than-expected provisions from credit card losses. During the first half of 2003, for example, provisioning rose 203% year-on-year to Won698 billion.
At the end of 2002, IBK had a total CAR of 10.4% of which tier 1 accounted for 8.4%.
In its favour, IBK benefits from the same liquidity support as KDB and Kexim and has an A3/BBB+ rating, only one notch lower than the sovereign on the S&P side. Because of its default risk is lower than the "pure" commercial banking sector, its cost of funds is also lower and the bank commands a much higher Net Interest Margin than the sector average (2.5% in 2002).
Its charter states that it has to lend at least 80% of total loans to the SME sector and as of December 2003, it accounted for 16% of loans to the sector, 2% behind market leader Kookmin.
IBK's June 2008 bond is currently bid at about 85bp over Treasuries or 65bp over Libor.
