Korea Housing Finance Corp (KHFC) beat choppy markets to price a $500 million covered bond early yesterday morning. The deal, which matures in five years and five months, is the third covered bond out of non-Japan Asia and is KHFC’s second deal following its debut issue last year.
Covered bonds are backed by cashflows from mortgages or public-sector loans, similar to asset-backed securities; but stay on the issuer’s balance sheet, like secured bonds. Kookmin Bank issued the region’s first deal in May 2009 when it raised $1 billion — and, so far, all the issuance has come from Korea.
Covered bonds are still a new asset class in Asia, but borrowers in Europe have embraced them because their unique structure achieves high credit ratings and favourable capital treatment, and therefore lowers funding costs. In total, European borrowers had $3.3 trillion of bonds outstanding at the end of last year.
To date, few Asian governments have created the legal framework to encourage covered bond issuance in the region, but this could start to change now that Korea is planning to develop its market — it is expected to announce a legal framework soon. Australia is also expected to introduce legislation to enable covered bond issuance.
KHFC’s covered bond is secured by a pool of mortgage loans bought from seven participating banks — Hana Bank, Industrial Bank of Korea, Kookmin Bank, Korea Exchange Bank, Shinhan Bank, Standard Chartered First Bank and Woori Bank.
KHFC is a government-owned institution that provides housing finance to medium- and low-income borrowers, and is the only institution in Korea with a legislative framework that lets investors take statutory priority over the cover assets, which protects them from other creditors’ claims in the event of bankruptcy.
Such security is attractive in today’s volatile markets; KHFC’s issue is rated Aa3 by Moody’s, which is one notch above the Korean sovereign’s A1 rating. BNP Paribas and Standard Chartered, which jointly arranged KHFC’s first covered bond, were mandated again this time, with Nomura also joining as a bookrunner.
“There is a flight to safety and KHFC’s covered bond was highly rated, one notch above the sovereign ceiling. In volatile markets, investors are looking for defensive structures,” said one person familiar with the deal.
The bonds priced at Treasuries plus 218bp, at the tight end of the final Treasuries plus 218bp to 222bp guidance and 7bp inside the initial guidance of Treasuries plus 225bp. The bonds tightened slightly and traded at Treasuries plus 216bp in secondary trading yesterday morning.
The deal was reoffered at 99.43 to yield 3.618% and the coupon was fixed at 3.5%. The bonds mature on December 15, 2016.
The deal gathered an order book of $1.5 billion from 121 investors and was anchored by US and Asian investors, which each took up 41% of the deal.
Within Asia, Singaporean investors bought 15%, Korean investors 4%, Japanese investors 5%, Hong Kong investors 16% and Chinese investors 1%. Australian investors bought 7% and European investors bought only 11% of the deal. By investor type, fund and money managers bought 47%, banks 36%, insurers 9% and central banks/governments bought 3%. Corporates and private banks bought 5%.
KHFC’s bond issued last year is not actively traded, so investors used the more liquid Kexim bonds as a reference point. According to one person familiar with the deal, the Kexim October 2016s were quoted at Treasuries plus 202bp and, including a two-month tenor extension, a new implied Kexim December 2016 would trade at Treasuries plus 209bp.
With a new issue premium of 20bp, this would put a theoretical new Kexim 2016 at Treasuries plus 229bp, which meant that KHFC priced 11bp inside of Kexim.
However, this is not a like-for-like comparison as KHFC’s issue is secured while Kexim’s is not. Kexim is also rated one notch lower than KHFC. Additionally, quotes from rival banks put the Kexim October 2016s tighter at Treasuries plus 193bp on Monday.
