KoFC prepares investors for future funding and divestments

Last week Korea Finance Corporation (KoFC) completed a worldwide non-deal roadshow arranged to introduce the firm to investors and media, and prepare them for eventually tapping of the international capital markets.

Jae Han Ryu, chief executive officer of KoFC, was circumspect about the new policy bank's future role, and also about its funding plans next year. His business is still, as appropriate given its recent genesis, very much a work-in-progress.

KoFC is the new entity set up as part of the privatisation process of Korea Development Bank (KDB), and will take on the public policy functions of supporting small- and medium-size enterprises (SMEs) and providing financing for economic development. It was officially formed on October 28 and is wholly owned by the Korean government through the Ministry of Strategy and Finance, and hence has been assigned the same credit rating as the sovereign: single-A from Standard & Poor's, A2 from Moody's and A+ from Fitch.

Regarding its future role, Ryu told FinanceAsia that, "KoFC is examining various alternative models, including the lending policies and structures of Germany's state-owned KFW, but a key function will be to support areas where market-based solutions are less effective -- for instance, new growth industries and green technologies, which are often considered high risk and so can struggle to access funding. A core sector is also likely to be small- and medium-size enterprises".

"A lack of investment leads to high unemployment, so it is important to promote and help new growth industries", he explained.

But "KoFC has no intention to exercise any management control or influence over the companies it invests in, and what form that investment takes will largely be determined by those individual firms. But loans are likely to be a major part of that support intermediation", he said.

And that support will not be constrained by geographical origins. "The nationality of potential investee firms isn't important, so we won't be differentiating between foreign and domestic enterprises", Ryu insisted.

Nor does KoFC seem encumbered by any chauvinistic or strategic pressure to restrict the buyers of its assets designated for sale to just Korean companies or investors. But, neither is it in a particular hurry to make those disposals.

"There is no fixed timeline, nor any preferred method for how the divestments should be done. All options will be considered, although there is considerable interest already in the financial groups in our portfolio, such as KDB, Woori and Daewoo, and we don't rule out block sales", said Ryu.

"There are two main premises for divestments: KoFC must be able to function as a standalone entity as it assumes the public service role of KDB; and KDB's investment banking operations and the other companies designated for privatisation need to be in a state to compete effectively in the market place".

"KDB's relative strength is its corporate banking; where it is weaker is its funding structure which is too reliant on bond issuance", he added.

But, KoFC too will seek funding from both the domestic and international bond markets, and expects to raise about W15 trillion ($12.9 billion) a year. But, of course, said Ryu, "we are newly created so don't have the foreign currency balance sheets of other state-owned policy banks and have no need to be as prolific in the international markets".

That said, although the Korean government has no preference about which currencies KoFC funds itself in, it expects the new policy bank to be the benchmark for international bond deals from other Korean issuers, he said.

"KoFC will borrow money in the same way that KDB and Export-Import Bank of Korea currently do, that is, without an explicit government guarantee. But there is a provision for the state to guarantee KoFC repayments with the consent of the National Assembly," he said.

As for timing, investors needn't hold their breath.

"We are unlikely to tap the overseas bond markets before the second half of next year, as we are still undergoing documentation processes for MTN programmes and going through other formalities -- and they take time to complete," concluded Ryu.