Government-owned Korea National Oil Corporation (KNOC) priced a $700 million five-year bond early yesterday morning -- its first foray into the international debt market since its $1 billion debut almost 18 months ago. The 144A/Reg-S notes printed with a fixed-rate 2.875% semi-annual coupon, which is the lowest coupon ever achieved by a Korean issuer on a five-year tenor.
The senior unsecured notes were issued as part of KNOC's $4 billion global medium-term note programme and reoffered at a cash price of 99.838 to yield 2.91%.The yield translated into a spread of 175bp over the five-year Treasury, which was in line with initial guidance. The bonds will mature on November 9, 2015.
The Korean utility sector is very liquid, with recent issues from Korea Hydro Nuclear Power (Korea Hydro), and Korea Electric Power Corporation (Kepco) in the five-year segment of the market, as well as KNOC’s own 2014 bonds and the 2014 and 2020 bonds issued by Korea Gas. So, finding an appropriate set of credits to gauge fair value was pretty straightforward.
The bonds were launched as sentiment in the investment-grade market was picking up after a quiet week last week. In particular, the Asia investment grade index gained 4bp in Tuesday's trading.
On that same day, Korea Hydro’s 2015 bonds and the Kepco 2015s were trading at 163bp and 133bp over five-year Treasuries, respectively. On a z-spread basis, Korea Hydro was trading at 144bp, while Kepco was at 112bp.
When the deal was announced, the existing KNOC 2014 bonds tightened by 5bp to Treasuries plus 138bp.
Taking into account a new issue premium and the 16-month extension from the existing 2014s, a 37bp difference between the existing and the new notes could be considered fair value.
Diksha Gera, credit desk analyst at Nomura, viewed the final pricing as fair to slightly tight relative to its peers within the Korean quasi-sovereign corporate market. In fact, Gera argued that “the pricing didn’t really leave much on the table for investors”.
By late afternoon yesterday (Hong Kong time), the KNOC 2015 bonds had tightened slightly to 172bp over Treasuries, which was equal to a z-spread of 143.9bp. The cash price had risen slightly to 99.98, for a yield of 2.879%. The Kepco 2015 continued to hover around the level where it traded when KNOC priced, and by late afternoon fetched a z-spread of 114bp.
Underpinned by the strength of the credit – KNOC is rated A1 by Moody’s and A by Standard and Poor’s – and the healthier market backdrop, the notes received a solid reception from institutional investors. The final order book amounted to $1.5 billion from 113 accounts.
Geographically, 33% of the new notes were placed into Europe, 32% into the US, 15% into Japan and 20% into the rest of Asia. By investor type, 41% went to fund managers, 32% to banks and financial institutions, 16% to central banks, 6% to insurance companies, and 5% to others.
Barclays Capital, BNP Paribas, Credit Suisse, Deutsche Bank and Korea Development Bank were joint bookrunners.
