Continuing its run of success with Korean corporate bond mandates, Credit Suisse First Boston has the books for a five-year, fixed rate deal. Regarded as parent group Hyundai Motor's house bank, CSFB will be hoping to emulate the success of its recent $467 million exchangeable for Hyundai Motor into Kia Motors, launched early this month.
Kia's debut international bond deal, rated BB-/Ba3, should also prove to be one of the most interesting international transactions out of the Republic this year. Despite its low double-B rating, the lead is likely to try and push pricing as close as possible to triple-B levels, backed by a combination of positive credit momentum, lack of direct comparables and strong demand for Korean paper.
Given that Korean companies have been largely absent from the international bond markets since the beginning of the financial crisis, there are virtually no outstanding deals at the longer end of the curve. For some investors, the initial pricing benchmark will, therefore, be a cluster of shorter-dated bonds by Hyundai Motor, which has a one notch higher rating of BB/Ba2.
Korea's largest auto manufacturer has a $150 million 7.33% December 2005 issue trading at a bid/offer spread of 508bp/449bp and a $125 million 7.6% July 2007 put 2004 issue trading at 441bp/365bp.
As a rule, the bonds have tended to track but slightly lag the trading performance of Korea's sub debt sector. The 2007 put 2004, for example, was still out at a 650bp level in mid-March, at a time when sub debt issues were noticeably starting to tighten. Since then, it too has come in by about 200bp.
However, the bonds' huge/bid offer spreads are indicative of exceptionally thin liquidity and the lead is consequently believed keen to try and re-price the lower end of the corporate credit curve. In particular, it is thought to be aiming for a 200bp level behind last week's $100 million seven-year deal for BBB-/Baa3-rated Kumgang Korea Chemical, which priced at 270bp over Treasuries.
Some bankers will argue that this may prove overly ambitious given current sub debt trading levels. A Ba3-rated comparable such as Cho Hung Bank, for instance, has a 10.658% January 2005 issue trading at 682bp/648bp, some 200bp wider than Kia's indicative level.
That it might succeed will be a function of limited supply and a positive earnings story. Both Kia and Hyundai are regarded as two of only a small elite of Korean companies likely to improve profitability this year.
Between them, they control just over 70% of the domestic auto market and have seen strong export growth bolster first quarter earnings and share price rises that have far outstripped the market average. For the first three months of this year, Kia reported net income of W115.5 billion ($88.91 million), a 117.5% increase over the previous first quarter.
Of the 214,547 vehicles manufactured January to March, some 124,102 were designated for export. Kia also has a 42% market share of Korea's fast-expanding recreational utility vehicle (RV) sector. Since 1998, RV sales have grown from 12.1% to 29.6%, in what the company attributes to changing lifestyles for the average Korean and low cost LPG.
Having been taken into receivership in 1998, Kia was bought by Hyundai in 1999. Since then, it has worked hard to improve its financial profile, though it is still considered weak in relation to both Hyundai Motor and international automakers.
In its recent ratings release, Moody’s commented that the company's "quick turnaround from receivership-status and strong improvement in financial leverage" were two of the chief positives underpinning its stable outlook.
According to the company’s annual report for 2000, it had outstanding debt of W5.107 trillion ($4.054 billion) as of end December, against shareholders' equity of W3.06 trillion ($2.43 billion), giving a debt to equity ratio of 166.8%. By comparison, Hyundai Motor had outstanding debt of $3.518 billion.
