Korea National Housing Corporation (KNHC) yesterday joined the long list of Korean borrowers to tap the international capital markets this year, when it raised $750 million from a Reg-S five-year deal. It was the state-owned agency's first US dollar offering since late 2006.
KNHC is the first Korean issuer out of the blocks after a brief summer lull; further deals are expected from Export-Import Bank of Korea (this would be its third issue this year), Korea Expressway, Korea Railways and National Agricultural Cooperative Federation (NACF).
Korea National Oil Corporation and Woori Bank raised $1 billion and $800 million respectively at the end of July. Since then, deals have been issued by Malaysian government-owned Petronas, Indonesian state power company PLN and Chinese property developer Country Garden, which emphatically reopened the Asian high-yield market with a $300 million transaction on Wednesday.
KNHC's senior unsecured bonds pay a semi-annual coupon of 4.875% and were re-offered at 99.606 to yield 4.965% to a maturity date of September 10, 2014. The yield represented a spread of 265 basis points over the benchmark five-year US Treasury yield, and was at the tight end of the initial guidance of 265bp-275bp. It also translated into 227.1bp over mid-swaps.
People close to the deal pointed out that KNHC's issue is the biggest regulation S bond sale by an Asian ex-Japan borrower and has the lowest coupon for an Asian dollar deal in 12 months. It was also priced at the tightest spread for a Korean issuer in 18 months.
In immediate after-market trading, the bonds were offered at 262bp over Treasuries -- 3bp tighter than the issue spread.
Other recent government-backed Korean corporates, such as Korea Electric Power, Korea Hydro and Nuclear Power and Korea Gas, all trade around 245bp over Treasuries, so KNHC effectively paid a new issue premium of about 15bp-20bp.
The spreads Korean borrowers now pay have narrowed dramatically since January when Kexim raised $2 billion at 678bp over Treasuries. Yet, as Brayan Lai, credit analyst at Calyon, pointed out, even in the mid-200bp range, the spreads offered by Korean state-owned companies with the sovereign single-A rating are as much as 150bp cheaper than the same-rated credits in the US which are currently raising cash at 3.5% yields.
On the other hand, another analyst argued that global investors still require a Korean "premium" to compensate for sovereign political, economic and transaction risks.
But, more worrying for future Korean borrowers, the issuance of more than $18 billion in bonds by Korean entities already this year means that institutional investors -- particularly those in the region -- are increasingly close to reaching their credit limits, according to Lai.
The bookrunners for the issue are Bank of America Merrill Lynch, Citi, Goldman Sachs, Morgan Stanley, and UBS. Samsung Securities acted as a joint-lead manager. They arranged investor roadshows for the agency this week, hitting Singapore on August 31, Hong Kong on September 1 and London on Wednesday -- by which time the order book had supposedly reached $600 million.
In the end, the total demand was $2.57 billion after the leads received orders from 247 accounts. In the final distribution, 68% was placed in Asia and the rest in Europe. Commercial banks bought 39% of the issue, fund managers took 35%, private banks 21% and the rest was sold to miscellaneous investors. The bonds will be listed in Singapore.
KNHC's key policy role is to provide low-cost rental housing at discount prices with financial support from the government, including equity injections and tax breaks.
The bonds are rated A2 by Moody's and the equivalent single-A by Standard and Poor's -- both with stable outlooks. S&P based its rating on KNHC's "important public policy role as a wholly owned government entity responsible for implementing the Korean government's nationwide public-housing policy".
According to government public sector restructuring plans, KNHC will merge with Korea Land Corp next month with the aim of improving the overall management efficiency of both public entities by eliminating overlapping businesses within the two organisations. According to S&P, the impact of this plan on KNHC's creditworthiness is limited because its policy role is not likely to weaken and continued government support is expected after the merger.
However, the rating agency warned that KNHC's capital structure has worsened recently because its large projects are taking place amid volatility in the housing market. In particular, its debt-to-capital ratio has deteriorated to 77.1% as of the end of 2008 from 73.2% at the end of 2007, and is unlikely to improve soon due to planned (and mandatory) capital spending over the next few years.
