Industrial Bank of Korea (IBK) followed close on the heels of Korea East-West Power (KEWP) by launching a successful dollar deal late on Tuesday night. Like the thermal power generation company, which priced a deal 24 hours earlier, IBK is state-owned, tapped the five-year part of the yield curve and raised $500 million.
However, there was a significant difference: IBK and its five advisers were more aggressive, sparing investors little if any new-issue premium. The senior, unsecured IBK notes pay a 2.375% coupon and were re-offered at 99.532 to yield 2.475% to a maturity date of July17, 2017. That was a spread of 185bp over the five-year US Treasury benchmark.
Initial price guidance was 200bp over the Treasury yield, but the spread quickly narrowed as orders jumped to more than $1 billion within a couple of hours of the deal’s announcement. A seasoned, but illiquid IBK September 2016 bond was bid at 195bp, which indicated that fair value for a new IBK issue, adjusting for the yield curve, was about 205bp, according to a person familiar with the transaction. So, even the first, tentative price suggestion was a tad punchy.
Instead, investors preferred to use two other Korean policy banks as more appropriate reference points. Korea Development Bank’s (KDB) August 2017 issue was bid at 185bp and Export-Import Bank of Korea’s (Kexim) January 2017 issue was bid at 173bp. On a swap basis, said the person, IBK’s issue was tighter than the KDB bond. Clearly, IBK also had scarcity value, having not come to the market for more than a year. KDB and Kexim are both regular borrowers.
The deal was pitched aggressively and finally priced even more so. In trading yesterday afternoon, the bonds were bid at a spread of 184bp. In contrast, the KEWP issue was sold at a spread of 195bp.
The total value of the order book was $2.25 billion, made up of more than 170 investors. More than half of the paper (53%) was bought by accounts in Asia, 30% was placed in the US and 17% in Europe. By investor type, 38% of the issue was sold to fund managers, 33% to commercial banks, 12% to central banks, 10% to private banks and the remaining 7% to insurers.
The notes were issued under the bank’s existing $8 billion global medium-term note programme, and were sold to professional investors in the US under the SEC’s Rule 144a.
The joint bookrunners for the transaction were Bank of America Merrill Lynch, Citi, Deutsche Bank, Goldman Sachs and Standard Chartered.
The issue is rated A1 by Moody’s, the equivalent A+ by Fitch and a notch lower at single-A by Standard & Poor’s. The respective ratings are also those assigned to the sovereign credit, reflecting the de facto solvency guarantee by the government for IBK.
IBK is one of the main state-owned Korean policy banks, but its privatisation has been discussed since 1994. It is currently 72.1%-owned by the government (68.6% directly, 1.9% through Korea Finance Corporation and 1.6% through Export-Import Bank of Korea). IBK is mandated to provide credit to small- and medium-sized enterprises, and tends to focus on the manufacturing sector.
The proceeds of the bond issue will be used for IBK’s general corporate purposes.
