The Export Import Bank of Korea (Kexim) completed a $500 million bond issue yesterday (November 7), becoming the first Korea issuer to break through the 25bp barrier in the five-year sector. The A/A3/A+ (Fitch) rated bank chose an FRN structure for the deal, which marks its second international bond offering so far this year.
Under the lead management of Credit Suisse First Boston, HSBC and UBS, the group priced the deal at par on a coupon of 24bp over Libor. Fees were 12.5bp.
Pricing at this level came through initial guidance of 25 to 29bp over Libor and at the tight end of revised guidance between 24bp and 26bp. It also came 3bp through Kexim's own secondary market curve. Earlier this year, Kexim issued a five-year deal, which has a March 2010 maturity.
This was trading yesterday at 27bp over Libor. Bankers say the curve between March and November is fairly flat, with KDB's September 2010 bond, for example, also trading at 27bp over. Late last week, both bonds had been bid around 33bp over.
Kexim chose to issue this week as there is no data being released and it opted for an accelerated 48 hour execution period to minimise market risk. As Executive Director SU Hong explains, "US Treasuries rates have been rising sharply recently and spreads have been volatile. This is one of the main reasons why we chose an FRN structure and why we wanted quick execution. There was no need for investor presentations as we completed non-deal roadshows in Europe and the US a few months ago."
The order book for the deal is said to have closed two-and-a-half times covered with participation by 49 accounts. By geography, the book split 39% Europe, 32% US and 29% Asia. By investor type, it split 47% banks, 40% asset managers, 11% central banks and 2% insurance.
Hong is particularly pleased with a transaction, believing it builds upon the groundwork of its predecessor at the end of what has been an uneven year for the Asian bond markets. "In March we became the first bank to break the 30bp mark in five-years," he says. "Now we've become the first to break 25bp. We're extremely pleased with the response from investors and believe our success will set a positive market tone for other Korean borrowers to follow."
As a result of the new deal, Kexim has now raised just over $2 billion for the year, close to its original $2.5 billion target. In March it set the ball rolling with a $1 billion five and 10-year offering.
The bank deliberately front-loaded its 2005 borrowing programme after concluding it might get caught out by rising Treasury yields in the second half. This proved to be a wise decision, with the twin tranche deal hitting the market shortly before Ford and GM worries blew spreads out.
Since then Kexim has raised a small amount in the private placement market and $408 million in mid-October after divesting a 7.9% stake in IBK.
And as IBK itself showed in mid-September with its own $500 million deal, investors like defensive FRN structures in a rising interest rate environment. This deal was priced at 33bp over Libor.
Hong now believes the beginning of 2006 may prove to be a volatile time for the bond markets. "A new Fed chairman will be installed in February, which may unsettle the market," he comments. "Rates may also continue to rise and the yield curve may steepen. At the moment it's still quite flat."
He is also hopeful of further rating increases. Late last month Fitch upgraded Korea to A+ on the basis that progress is being made with North Korea over nuclear disarmament.
"Korea should be a double-A country," he concludes. "No other country with world beating companies in the shipbuilding, IT, steel and automobile sector would have a single-A rating. It all comes down to geopolitical risk. But as the six party talks progress, the rating should improve."
