The Export-Import Bank of Korea (Kexim) completed its biggest bond to date on Wednesday, with a record breaking $2.5 billion triple-tranche offering.
The Aa2/AA-/AA- deal was executed against a volatile Treasury market backdrop and at an interesting juncture in Kexim's own history as it prepares to help the government bail out the country's ailing shipbuilding industry.
Its market entrance also follows a month-long lull in activity from the Republic following Kia Motors' enormously popular $700 million deal in mid-April, which attracted a $10 billion order book.
Kexim's peak order book topped $6.5 billion, according to its final sales note, with the final order book totalling $5.2 bilion. This was not too far off the $7.5 billion level it achieved when it executed its last benchmark deal: a $1.75 billion long five-year and 10-year deal last November.
Choppy waters for Treasuries
it was a fairly impressive achievement given the Treasury market backdrop on Wednesday. For after deciding the Federal Reserve will not be raising interest rates any time soon, many participants found themselves blindsided by a slew of strong numbers from the US over the past few days suggesting the opposite.
These stronger than expected data points include: April's housing starts, which came in at 1.172 million, ahead of expectations for 1.125 million; a 0.4% month-on-month increase in consumer price inflation (its fastest increase in three years) and a 0.7% rise in industrial production, compared to forecasts around the 0.3% level.
This more risk-averse environment pushed 10-year Treasuries to the 1.84% level by late morning New York time on Wednesday compared to 1.77% the day before.
However, bond specialists said softening Treasuries encouraged yield buyers back into the market.
"Demand for credit is pretty bottomless at the moment, especially now you've got the European Central Bank pumping money into the market," said one observer.
Kexim split its SEC registered deal into three parts.
A $500 million three-year FRN was priced at par to yield 70bp over three-month Libor. This attracted an order book of $1 billion with participation from 77 accounts.
By geography, 44% were from the US, 39% from Asia and 17% from Europe. By investor type, banks took 35%, followed by sovereign wealth funds/central banks and SSA's on 33%, fund managers on 24%, US corporates 5% and insurers/pension funds 3%.
A $1 billion three-year fixed-rate tranche was priced at 99.866% on a coupon of 1.75% to yield 77.5bp over Treasuries.
This attracted a $2 billion order book and 106 accounts. This was again led by the US on 65%, followed by Asia 20% and Europe 15%. Sovereign wealth funds/central banks/SSA's took 42%, with fund managers on 40%, US corporates 13%, banks 3% and private banks 1%.
Finally, a $1 billion 10-year tranche was priced at 99.79% on a coupon of 2.625% to yield 82.5bp over Treasuries.
This amassed the biggest order book of $2.2 billion and the most number of accounts, 131. Unusually the highest allocations were to Asia on 83% with 11% placed in Europe and 6% in the US.
The region's insurers and pension funds were allocated 59%, with fund managers on 30%, banks 7%, sovereign wealth funds/central banks/SSA's 3% and private banks 1%.
Initial guidance had been pitched at 95bp over three-year Treasuries and 105bp over 10-year Treasuries. This was subsequently narrowed shortly after London’s open to 2.5bp either side of 80bp over Treasuries for the three-year and 2.5bp either side of 85bp over for the 10-year.
Benchmarking the deal was fairly straightforward given Kexim has two existing three and 10-year bonds, which are only three months longer in duration than the new deal.
One broker was quoting its 2.375% August 2019 bond on a G-spread of 77bp at Asia's close on Wednesday.
The same broker quoted its 3.25% August 2026 bond at 81bp over.
This means the three-year has priced flat to secondaries, while the 10-year has offered a slim 1.5bp premium.
The flatness of Kexim's secondary curve is a reflection of ongoing demand from domestic pension and insurance funds for the kind of longer dated assets they cannot pick up in Korea, where the domestic bond market is far shorter in duration.
"It's quite remarkable really," one participant noted. "There's only 4bp to 5bp on the Korean curve between three and 10-years.
"Compare this to a benchmark credit like Westpac, which issued last week," the specialist added. "It completed a three-year deal at 80bp over Treasuries and a 10-year at 115bp over: a 35bp differential."
In a sales note ahead of launch, Mizuho suggested Kexim’s deal could perform well in the secondary market because Korean AA rated spreads have yet to catch up with similarly rated US corporates.
It pointed out that Proctor & Gamble priced a 2026 bond at 75bp over Treasuries in January. That deal is now trading 35bp tighter at 45bp over.
By contrast, Kexim was last in the dollar-denominated market in February when it raised $400 million from its second-ever green bond. This five-year deal came on a difficult day for global markets, spooked by falling oil prices.
As a result, US investors disappeared, leaving Asia to anchor the $1.1 billion final order book and account for 48% of overall allocations.
It priced at 87.5bp over Treasuries and was trading Wednesday at 75bp over, only 10bp tighter.
Bank of Korea gets that sinking feeling
Looming in the background of Kexim’s new deal is a disagreement between the government and central bank over how to re-capitalise the policy banks so they can support the country's ailing shipbuilding industry.
Korean newspapers estimate KDB and Kexim have a combined $47 billion exposure to the three struggling shipbuilders: Hyundai Heavy industries, Daewoo Shipbuilding and Samsung Heavy Industries. All three have seen their businesses decimated by a global downturn, exacerbated by excess supply from China.
Local newspapers say the government wants Bank of Korea to enhance the banks' capital cushions either by buying their bond deals or facilitating a liquidity injection by increasing its ownership in them. However, the central bank has counter-argued in favour of a separate re-capitalization fund backed by a Ministry of Finance guarantee.
According to S&P Global Market Intelligence figures, Kexim reported a Tier 1 ratio of only 8.9% at the end of 2015 and an overall capital adequacy ratio of 10%.
Earlier this year Kexim’s senior finance officer BS Kim told FinanceAsia the policy bank has a $12 billion fundraising target in 2016.
Prior to the new deal, it had raised a total of $2.19 billion, according to S&P Global Market Intelligence data. This includes deals in dollars, euros, the Brazilian real and five offshore renminbi-denominated issues.
The Chinese currency deals all range around the $30 million to $33 million mark. The first, which priced on February 12, comprised an Rmb215 million offering with a three-year maturity and 5.2% coupon under the lead of Credit Agricole.
The most recent, on March 23 under Standard Chartered's lead, had a similar issue size (Rmb220 million) and tenor, but achieved a tighter 4.5% coupon.
All five deals provide a warm up for Kexim's proposed debut panda bond in China's onshore bond market. The bank has said it hopes to launch the deal during the second half of the year when it should become the second Korean issuer to tap the market after the Republic last December.
Joint global co-ordinators for Kexim's new bond deal were: Bank of America Merrill Lynch, BNP Paribas, Citi, Daewoo Securities, Goldman Sachs, HSBC and Nomura. Kexim Asia was co-manager.
This story has been updated since first publication with final deal stats.
