Korea National Oil Corp (KNOC) priced a $1 billion five-year senior bond early this morning, capturing what could well prove to be a brief window in the market. Barclays Capital, Bank of America Merrill Lynch, HSBC, KDB and Royal Bank of Scotland were joint bookrunners.
KNOC is a wholly government-owned upstream exploration and production company. Its bonds priced at Treasuries plus 310bp, about 20bp inside the initial price guidance, which was in the area of Treasuries plus 330bp. The deal was said to be about eight times covered. KNOC is the first dollar benchmark to close since Kexim priced its $1 billion bond last month.
Asian debt bankers have not been making much money during the past couple of months thanks to gloomy market conditions. Indeed, things are so bad that rival bankers were hoping the KNOC deal would succeed and go on to trade well in the secondary market, helping to restore confidence for other borrowers.
There were about 400 accounts in the book. Asian investors were allocated 44%, US investors 40% and European investors 16%. Fund managers were allocated 57%, banks 14%, insurers 18%, retail 6% and central banks/public institutions 5%.
The bonds pay a 4% coupon and the notes were reoffered at 99.387 to yield 4.137% to October 27, 2016. There is a change of control put at par if the Korean government ceases to own at least 51% of KNOC.
“We hope it tightens in secondary and gives investors confidence in buying into new issues,” said one banker away from the deal. “There have been deals printing in other parts of the world but we haven’t seen much issuance out of Asia which is frustrating.”
The bonds performed in secondary this morning, with the new KNOC bonds tightening to Treasuries plus 295bp/293bp, about 15bp inside the Treasuries plus 310bp issue spread.
Despite the deal gathering strong demand, last night bankers were not proclaiming the Asian dollar bond market open. “I don’t think this opens the market. We are still at the mercy of the situation in Europe and the US,” said one banker on the deal. “What this shows is that there are windows of opportunity. But if the markets tank, this window will shut again.”
KNOC was willing to pay a decent new issue premium. Its outstanding KNOC 2015s were trading at Treasuries plus 270bp and based on the initial guidance, the new issue premium was said to be between 30bp to 50bp.
KNOC also ticked the right boxes with investors. It is an investment-grade issuer (rated A1 by Moody’s and A by S&P) and its status as the government’s policy arm executing oil-related policy roles helped reassure investors.
“The operational and financial linkage leads to KNOC’s credit profile being closely linked with that of the Korean government and also enables KNOC to enjoy strong access to the debt markets,” said Mic Kang, Moody’s vice-president and senior analyst in a report.
It is also focused on the absolute yield rather than pricing as a spread over Treasuries. This helps in current market conditions, where spreads have widened but overall yields remain low. Furthermore, the company has funding needs to meet. Its recent acquisitions of Canada’s Harvest Energy Trust for W3.7 trillion ($3.3 billion) in December 2009 and British-based Dana Petroleum for W3.4 trillion ($3 billion) in October 2010 have raised its leverage, Moody’s also noted in the report.
The notes were issued under KNOC’s global medium term notes programme, which was upsized to $6 billion from $4 billion last month.
