Korea Housing Finance Corporation (KHFC) priced a $500 million covered bond late last night, ahead of new rules that will create a level playing field for would-be issuers.
The state-owned agency priced the five-and-a-half-year issue at 100bp over US Treasuries, which the leads described as a significant discount to the theoretical value of a new senior issue.
KHFC is rated Aa3 by Moody’s, A+ by Standard & Poor’s and AA- by Fitch — the same as Korea Development Bank (KDB) and Export-Import Bank Korea (Kexim) — but its covered bonds are rated a couple of notches higher at triple-A.
The joint leads — Citi, Nomura and Standard Chartered — started marketing a benchmark-sized deal last Wednesday and attracted “several” reverse enquiries that allowed them to anchor the book at an initial price of 110bp and to tighten by a further 10bp, even as equities plummeted amid the political farce in Italy.
The order book reached $1.7 billion across 91 accounts. Funds took 48%, banks 36%, central banks 8% and insurers 7%, with 1% going to others. By geography, 45% of the orders came from Asia, 30% from Europe and 25% from the US.
Korea’s covered bond bill is awaiting parliamentary approval this week and is expected to be enacted into law in September. KHFC is already authorised to issue its own version of covered bonds under a separate piece of law, but the rest of the market will have to wait until the autumn to take advantage.
Some market participants have criticised KHFC’s decision to issue a new bond before the law is enacted, arguing that it could have played an important role in establishing a market benchmark under the new framework.
“The timing of the new legislation is not set in stone,” said one source with knowledge of the deal. “It should be enacted around September, but who knows how long it will really take to get everything ironed out? If anything happens, the first deal may not get done this year, so why run the risk?”
For now, Korea remains a one-issuer market, but it is expected that the country’s banking industry will be keen to take advantage of the structure.
Covered bonds are backed by cashflows from high-quality mortgages or public-sector loans and are similar to asset-backed securities, with the difference being that they stay on the issuer’s balance sheet. The attraction for issuers is that they carry high credit ratings and are eligible for favourable capital treatment, which lowers funding costs.
In a report on the new market, Fitch added that Basel III liquidity requirements will create incentives for lenders to lengthen the duration of their liabilities, which may also encourage covered bond issuance.
In Australia’s three-year-old market, the big four banks are selling covered bonds at spreads that are around 65% to 70% of those for their senior debt, compared to a ratio of around 80% when the market first opened.
Bankers on the KHFC deal claim this latest deal compares favourably with the Australian ratio, though it is difficult to say given the fact that there are no KHFC senior bonds to compare to.
KDB and Kexim were trading at around 98bp over US Treasuries at the time of the deal, according to a banker who claimed that a new five-and-a-half-year senior issue from KHFC ought to price at around 135bp to 140bp. That pitches the covered bond at less than 75% its theoretical senior curve.
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.
