Korea's proxy sovereign borrowing, Korea Development Bank (KDB) priced a $750 million twin-tranche global bond offering in New York yesterday.
In an apparent effort to forestall a pure sovereign transaction and answer critics who accuse it of an inflexible and unprofessional attitude, the bank went out of its way to listen to the market. And KDB appeared to have acquitted itself after it accelerated launch of the transaction to take advantage of stronger Treasury and swap spreads and switched the sizes of the two tranches. This led to an increase of the 10-year tranche from $250 million to $450 million and reduction of the five-year tranche from $500 million to $300 million.
Under the lead management of Barclays, Credit Suisse First Boston and JPMorgan, pricing of the five-year came at 99.835% on a coupon of 4.25% to yield 4.28%. This equated to a spread of 135bp over Treasuries, or 75bp over Libor. The ten-year was priced at 99.552% on a coupon of 5.5% to yield 5.559% or 148bp over Treasuries and 90bp over Libor.
Fees for the five-year amounted to 20bp and 25bp for the 10-year.
The most relevant pricing benchmark was KDBÆs outstanding November 2006 bond, which is also quoted off a five-year Treasury, but has a one-year shorter final maturity. At pricing, this was said to have been trading at 113bp bid, equivalent to 87bp over Libor. This means that on a Treasury spread basis, the new deal has come at a 22bp premium and on a Libor basis 12bp through secondary market levels.
The difference can be explained by the steepness of the swap curve between four and five years, but it meant that fixed rate investors felt they were getting an attractive pick-up to the 2006, while KDB felt it had got aggressive pricing on an after swap basis. Where the 10-year is concerned, pricing came at a 13bp premium to the Treasury curve.
Pricing through the 2006 on a Libor basis resulted in diminished enthusiasm from regional bank buyers, which have been the mainstay of the Asian bond markets in recent years. But as bankers point out, the recent re-opening of the 2006 deal, means that there is still quite a bit of paper floating around the market, although pricing of the new deal prompted spreads of the old to come in 10bp over the course of Asian trading yesterday.
The 10-year tranche represents the first long-dated benchmark from Korea since the Asian crisis and as such, its book was comfortably oversubscribed and spilled back into the five-year. Observers report a final order book of $2.6 billion, with $1.1 billion of demand for the five-year and $1.5 billion of demand for the 10-year, an oversubscription rate of three to three-and-a-half times.
Allocations on the five-year saw 48% placed in the US, 28% in Europe and only 24% in Asia. Similarly the 10-year saw 49% placed in the US, 34% in Asia and 17% in Europe. A total of 160 investors participated and because of overlap in the two tranches, there were 96 accounts in the five-year and 121 in the 10-year. One observer estimated that 42 accounts were new to the credit since the bank has been upgraded back to the single-A level again. The largest investor placed an order for $70 million and there were a slew around the $20 million to $50 million mark.
By investor type, the five-year was split asset managers 42%, banks 22%, insurance companies 19%, pension funds 10%, retail 7%. The 10-year, on the other hand, saw asset managers take 53%, insurance funds 20%, banks 19%, pension funds 4%, retail 3% and corporates 1%.
Bankers conclude that KDB's deal marks the first time this year that investors have outweighed Asian investors in a short-dated deal. "What was so great about this deal was the fact that KDB got tight Asian pricing even though the book was driven by US," says one observer.
The reason for strong US demand was said to be a desire to diversify away from US corporates even if the spread was not that attractive on a like-for-like basis. "Quite a few US state pension funds participated because they don't want to be so overweight corporate paper," says one syndicate specialist. "And the reason they like KDB is because there aren't that many single-A rated sovereigns around. There are plenty of emerging market sovereigns with lower ratings and a number with triple-A ratings, but very few at this level. This is a bond which has great rarity value."
The participation of ever larger numbers of high-grade accounts means that KDB's investor base is steadily shifting away from its previous emerging markets bias. It also means that investors had different concerns during roadshows.
Where previously the focus has been on relative value to other sovereigns in the region and particularly Malaysia, bankers say investors were more focused on KoreaÆs macro story this time round. Investors appear to have become a lot more comfortable now that the Republic has attained an A-/A3/A rating again.
Observers also say that the threat of a new sovereign bond did not prompt concerns for a pricing premium, as most realize that if it happens it will be a one-off and KDB will remain the main sovereign benchmark.
In terms of timing, KDB also benefited from canceling its London roadshow and accelerating launch ahead of the latest FOMC meeting. Bankers report a rapid back-up in US Treasury yields as concerns about US elections and re-financing mount. Five-year Treasuries have moved off their 2.75% lows and were at 2.937% at the time of pricing and 3.04% as New York opened one day later. Similarly the 10-year moved from 4.07% to 4.11%.
Alongside the $750 million public transaction, the three leads are also structuring a $300 million short-dated bilateral deal, that will have a variety of different maturities. Pricing is not being disclosed.
