The pricing of a $750 million upsized bond issue for the Korea Development Bank (KDB) during New York's afternoon yesterday (Wednesday) topped off a day-and-a-half of intense issuance activity by Korean borrowers. Deals for KDB, Shinhan and Woori all appeared to be a success, with many considering the two bank deals a particularly attractive proposition for investors.
All three borrowers followed an understandably cautious strategy of marketing wide guidance in the hope of building momentum and reigning price talk back in. And the response seems to show that the North Korean issue has at least temporarily faded in the minds of many international investors. On a wider level, it highlights renewed enthusiasm for Korea after July's gridlock, plus the return of domestic investors as active participants and a useful backstop bid. Many wonder how long it will last.
For KDB, it was very important to make its 10-year deal a roaring success. After the sovereign's controversial return earlier this year, the policy bank was keen to demonstrate that it knows the market best and can judge the right balance between its own needs with those of investors. It could also not afford to pull back from the market a second time after being forced to do so just over a month ago because of the North Korean issue and a glut of paper.
Joining Credit Suisse First Boston as global co-ordinator, were bookrunners Barclays, HSBC and JPMorgan on fees of 20 cents. The deal was priced at 99.617% on a coupon of 5.75% to yield 5.801%.
This equates to 119bp over Treasuries or 70bp over Libor. At these levels, the deal came 6bp inside the wide end of guidance and the same price talk in late July. On a Libor basis, saved about 15bp from waiting since the equivalent level in July was 85bp.
After a 16 hour marketing period, books closed eight-and-a-half times covered, with $4.25 billion in demand. Some 240 investors participated, of whom 45% came from the US and 27.5% each from Asia and Europe.
KDB normally judges itself in relation to the premium it prices against the sovereign. Normally it would aim to pay no more than 20bp on a like-for-like basis, but has paid about 30bp this time round on a Libor basis.
However, bankers say the sovereign's June 2013 bond provides an imperfect benchmark since it is trading very technically. Yesterday the 4.25% deal was trading at 90bp over Treasuries, or 45bp over Libor.
As one explains, "In July when Korean spreads were blowing out and there was oversupply in the market, traders put a lot of shorts on the big benchmark bonds like the sovereign issue. Then in August when the supply dried up and spreads started to tighten again, they found them very difficult to unwind.
"To have KDB and the sovereign being quoted at 45bp to 55bp over Libor for 10-year paper is pretty unheard of. What the new supply should do is correct the curve. There will be a convergence between bonds trading artificially tight and those which were trading much wider."
KDB is likely to be pleased if it is viewed as a facilitator of the process. Bankers also say that the global appeal of its deal underlines a more accepting view of the North Korean situation.
"It was a critical psychological hurdle to overcome," says one. "Asian investors drove the deal and once European and US investors saw the kind of momentum building, they all came piling in. It should give KDB and the rest of the pipeline a lot of confidence."
So much so, that the euro deal may imminently re-emerge as well. The borrower is said to be taking a pro-active approach towards finding a market window. The deal was originally slated as a Eu500 million five-year deal.
For Shinhan and Woori, which priced ahead of KDB, Korean demand was a far more important factor. Woori priced first on Tuesday via ABN AMRO and Merrill Lynch with a $500 million deal.
Having marketed a $300 million to $500 million the Baa2/BBB- rated bank was able to maximise proceeds after accumulating an order book of $1.4 billion. Pricing came at 99.97% on a coupon of 5.375% to yield 182.3bp over Treasuries or 135bp over Libor.
On a like for like basis, a steep credit curve between four and five years meant that it came just a few basis points wide of Woori's October 2002 deal, which was trading at 135bp over Treasuries at the time of pricing. Shinhan Bank has a July 2008 FRN trading at 100bp over Libor. A 35bp differential between the two, can in part be explained by a one notch rating differential, a smaller issue size and an FRN structure, which lends itself to being locked away by banks.
Woori's deal saw 81 accounts in the book and an allocation split of 40% Korea, 40% Asia and 20% Europe. By investor type, banks accounted for 44%, fund managers 21%, pension funds 20%, insurance companies 10% and hedge funds 5%.
There was a deliberate cap on placement in Korea where offshore bonds suddenly became very attractive in August after Treasury yields rose and Korean yields fell. However, this differential is said to have partially offset by a widening in the dollar/won basis swap, which widened from 45bp to 65bp in the hours after Woori priced.
This should have made life slightly more difficult for the $250 million Shinhan deal which followed, although it too ended up with a high domestic component. Some thought the recent launch of a deal for the holding company might eat up credit lines, but this too proved to be false, since the structure of the earlier deal classified it as a corporate rather than bank deal
With Barclays and Citigroup as lead managers, the Baa1/BBB rated bank priced its debut subordinated debt issue on Wednesday. Using a 10 non-call five structure, the upper tier 2 deal carries a Baa2/BBB- (Fitch) rating and was priced at 99.784% on a coupon of 6.25% to yield 270bp over Treasuries or 225bp over Libor.
This was also inside guidance, which started out at 275bp to 295bp over Treasuries.
With 48 participating accounts and four $50 million plus orders, the bank amassed about $800 million in demand. Final allocations show 40% placed in Korea, 34% Singapore, 16% Europe and 10% Hong Kong. By investor type, asset managers came in for 42%, banks 40%, insurance companies 10% and others 8%.
A number of observers thought pricing a little on the wide side. Some pointed out that while the Woori and Shinhan deals have the same rating, Shinhan has priced 95bp wider on a Libor basis.
A couple of analysts estimated 200bp over Libor to be fair value for the credit, but acknowledged the difficulties of pricing such a deal in a near vacuum. All the existing upper tier 2 deals from Korea are now very technical and the recent spate of lower tier 2 deals have non-investment grade ratings.
But as one observer concludes, "This transaction is very well timed. The summer is over, investors are back at their desks and the supply pipeline looks very congested over the coming weeks. With the number of deals scheduled to be launched, it seems very unlikely that Shinhan could have achieved a tighter spread by waiting."
