KDB first to tap bond market after sovereign upgrade

Policy bank Korea Development Bank (KDB) was first out of the gate on Wednesday, tapping investors with its inaugural 10-year dollar bond. The $750 million bond followed shortly after Moody’s upgraded the Korean sovereign to Aa3 from A1 last week. KDB, along with a number of other state-owned institutions were also upgraded and, capitalising on this, the policy bank swiftly launched a trade, taking advantage of the liquidity in the market to widen its investor base and push out an aggressive print.

“We definitely saw new investors to Korean paper and KDB in the book, mostly from the sovereign supra agencies,” said one person familiar with the deal. “A lot of the European agencies and sovereigns are on the downward trajectory, whereas KDB’s ratings are on the upward path, so it was well placed to take advantage of the liquidity in the market.

The deal re-opens the space for a slew of Korean borrowers — including Korea Hydro & Nuclear Power and Korea Expressway. KDB was also able to lock in pricing at a low coupon of 3%, which is the lowest out of Korea for the 10-year tenor since 2001.

The bonds priced at Treasuries plus 155bp, at the tight end of the Treasuries plus 155bp to 165bp final guidance and about 15bp inside of initial guidance. They also priced inside Yankee paper such as General Electric (A1/AA+), which had tapped the market for a $2 billion bond at Treasuries plus 160bp the night before KDB’s trade.

Despite the punchy pricing, the bonds performed in secondary trading, tightening to Treasuries plus 151bp/148bp. Spreads for Korean borrowers have tightened sharply since the start of this year. In January, Kexim tapped the market with its $1 billion 10.25-year bond at Treasuries plus 305bp. Those bonds have since tightened to Treasuries plus 157bp. The Kexim 2022s were the main comparable and, on a curve-adjusted basis, they were trading at a spread of 163bp, with the new KDB bonds coming 8bp inside of that.

KDB also has two outstanding bonds maturing 2017, which were trading at Treasuries plus 156bp. After adjusting for the curve, this put fair value of a new KDB 10-year bond at around Treasuries plus 165bp. KDB’s new bonds priced flat to its outstanding five-year bonds and re-priced the curve.

The order book was $2.2 billion from 150 accounts. Asian investors were allocated 48%, US investors 26% and European investors 26%. Fund managers were allocated 62%, insurance 17%, banks 9%, central banks 8% and private banks 4%. The notes, which mature on September 14, 2022, were reoffered at 98.781 to yield 3.14%.

Credit Suisse, HSBC, J.P. Morgan, KDB Asia, Morgan Stanley and Royal Bank of Scotland were joint bookrunners.

The deal concluded a week of tight execution for KDB. Earlier this week, the policy bank also tapped its outstanding offshore renminbi bond 3.3% bonds due 2015 for Rmb600 million ($94 million), taking the total issue size up to Rmb1.6 billion. The deal was driven by a reverse enquiry and placed to a small handful of investors. The proceeds were swapped to US dollars. BNP Paribas and Barclays were joint bookrunners.