Korea's Ministry of Finance and the Economy (MoFE) has put paid to plans for a $250 million upper tier 2 debt issue just a week before roadshows were due to start. Salomon Smith Barney was mandated for a 10 non-call five offering by the government-owned bank last month, having previously held a mandate for a hybrid transaction.
However, news of a prospective sub debt issue immediately raised eyebrows among Asian FIG experts, since Cho Hung is in the process of being merged with the Shinhan Financial Group - the one bank, which will need a boost to replenish capital written off as a result the acquisition.
For two years after the proposed merger, the two banks will remain technically separate for both accountancy and regulatory capital purposes. This means that at some point, Cho Hung is likely to need capital.
The MoFE's main problem is said to have concerned the timing of the issue. In particular it did not want Cho Hung presenting an independent credit story at a sensitive point in the merger proceedings. Korea Deposit Insurance Corp (KDIC), which is hoping to sell its 80.5% stake to Shinhan, is also believed to have opposed the idea backed by its financial advisor Morgan Stanley.
As one banker comments, "Given all the difficulties there's been getting the merger through, it was never going to be a good idea for one of the parties to be out raising capital and presenting its credit story to investors. And this is especially the case as Cho Hung has always been opposed to the merger."
The bank also has no immediate need for capital. End December figures show that NPLs have risen from 3.28% to 3.75% and the loan loss cover ratio from 90.7% to 94.9%. However, Cho Hung's CAR is still just above the regulatory 10% minimum threshold at 10.27% compared to 10.4% at the end of 2001.
Its outstanding 11.5% and 11.875% lower and upper tier 2 deals callable in April 2005 are currently trading around 220bp to 225bp over Treasuries. Despite Moody's decision to downgrade its outlook on the sovereign's A3 rating to negative last week, traders report that both bonds have held up well thanks to a strong onshore bid. Although they have tightened into the mid to high 100bp level since the beginning of the year, they are still hovering around their three month averages.
In the meantime, Korea First Bank has announced its intention to raise $400 million from a subordinated debt issue led by Lehman Brothers and UBS Warburg. The deal is likely to comprise $200 million in upper tier 2 debt and $200 million in lower tier 2 debt. Proceeds will partially re-finance a $200 million existing subordinated debt issue, which has a call option falling due in June.
A new deal should also help the bank to optimize its balance sheet. Since Newbridge Capital took a controlling 51% stake at the beginning of 2000, the bank's capital ratios have been re-built and rank as one of strongest in the domestic banking sector.
As of September 2002, for example, KFB was reporting an overall CAR of 12.39%. However, the overall ratio is unbalanced by excess tier 1 capital (8.10%) and as a result, ROE (Return on Equity) stands at a relatively lowly 7.64%. A new tier 2 issue should help to re-address this.
Compared to Cho Hung Bank, KFB currently has a one notch higher rating from Standard & Poor's (BBB- versus BB+), but a one notch lower rating from Moody's (Baa3 versus Baa2). While the two balance themselves out, it does seem likely that KFB will have a slightly lower overall sub debt rating, since it should be non-investment grade rating from both agencies, whereas Cho Hung has investment grade ratings from Moody's.
