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South Korean carmaker Hyundai Motor returned to the dollar market with a $500 million five-and-a-half year bond. The deal captured a strong rebound in equity markets after six central banks, led by the US Fed, cut the cost of dollar swap lines on Wednesday to reduce borrowing costs and avert a liquidity crisis.
In Asia, stocks were further buoyed by the People’s Bank of China’s decision to cut its reserve requirement ratio for large banks by 50bp. The Hang Seng Index soared 5.6% on Thursday and credit spreads tightened, with the iTraxx Asia Investment Grade Index opening 18bp tighter and Korean five-year credit default swaps starting the day 15bp tighter.
Taking advantage of this sudden (and perhaps momentary) improved backdrop, the leads — Bank of America Merrill Lynch, BNP, HSBC, J.P. Morgan and Morgan Stanley — announced the deal late Thursday morning. From the onset, they told investors that the size was capped at $500 million.
“If you announce a deal at $500 million, the assumption is that it will grow,” said one person familiar with the deal. “But Hyundai Motor had no interest in raising more. Telling investors from the onset helped in terms of the speeds the books built,” he added.
The deal was initially marketed at a generous spread of Treasuries plus 345bp and subsequently tightened to a final guidance of Treasuries plus 315bp to 325bp. According to the person familiar with the deal, there was price sensitivity in the book and several hundred million dollars worth of orders fell away as guidance was tightened. Despite this, the book remained resilient with more than $5 billion committed from 320 accounts, which meant that the leads could choose to allocate to high quality accounts.
This was borne out in the secondary performance of the bonds. The new Hyundai Motor 2017s tightened by 10bp to Treasuries plus 306bp/305bp in secondary trading on Friday afternoon.
The notes were issued through its US subsidiary Hyundai Capital America and guaranteed by Hyundai Motor Company, so investors were looking at the deal as a Hyundai Motor credit. The issue is rated Baa2 by Moody’s and BBB by Standard & Poor’s and Hyundai Motors was the first-triple B credit to price since July — a sign of just how choosy investors have become.
Hyundai Motor has a strong franchise in the US and as a result, its past deals have received strong US participation. It was no different this time round with US investors allocated the lion’s share (54%), Asian investors allocated 34% and European investors 12%. By investor type, fund managers were allocated 60%, banks and private banks 20%, insurance and pension funds 11%, and corporate and others 9%.
Hyundai Motor last tapped the dollar market in October 2010 with a $500 million five-and-a-half year bond arranged by Barclays Capital, Citi, HSBC and J.P. Morgan. Those bonds paid a 3.75% coupon and were reoffered at 99.793 to yield 3.792% or a spread of 250bp over the five-year Treasury yield. Its latest deal paid a higher spread and the notes were reoffered at 99.551 to yield 4.092%.
The outstanding Hyundai Motor April 2016s were quoted at Treasuries plus 275bp and according to a second person familiar with the deal, this put the fair value of the new Hyundai Motor bonds maturing June 8, 2017 at Treasuries plus 305bp. Based on the initial guidance, the deal offered a new issue premium of 40bp but this was brought down to 10bp based on the final price.
Notably, the Hyundai Motor 2017s priced 10bp inside of the KDB 2017s, which were quoted at Treasuries plus 325bp, despite the latter being a quasi-sovereign A-rated credit. KDB’s bonds, which priced late October, initially performed in the secondary market. The leads were rumoured to have run a short position and supported the bonds in secondary trading, but they have since widened quite a bit from the Treasuries plus 280bp issue spread.
The performance of Hyundai Motor’s bonds was also helped by the scarcity value they enjoy — the company has only three outstanding bonds, which mature in 2015, 2016 and 2017.
