Kogas's $500 million bond attracts strong demand

By pricing a dollar deal on a Friday with a negligible new issue premium in tough credit market conditions, Korea Gas Corporation (Kogas) managed to achieve, if not the impossible, then certainly the unlikely. In a year when a new Asian international bond issue that is not from Korea is as rare as a contemporary Australian cricketer anyone has actually heard of, Kogas convinced investors that its offering had scarcity value.

Even arch-contrarian Brayan Lai, credit analyst at French investment bank Calyon and a regular commentator in FinanceAsia's bond reports, was impressed, describing the deal as "good stuff".

Kogas priced the Reg-S/Rule 144a $500 million issue at 390bp over the yield of the five-year US Treasury benchmark note in the early hours of July 10 (Hong Kong-time). The bonds pay a coupon of 6% and were re-offered at 99.165 to yield 6.197% to a maturity date of July 15, 2014.

The bonds traded up close to par in Hong Kong on Friday and the bid-offer spread narrowed to 367bp-372bp over the Treasury yield. Enthusiasm for the deal had the effect of bringing in the whole Korean credit curve, with the recent five-year issue from Korea Hydro Nuclear Power (KHNP) also tightening to 372bp.  

Kogas, the world's biggest buyer of liquefied natural gas, is ultimately state-owned; the sovereign has a 26.8% holding, government-backed Korea Electric Power Corp (Kepco) has a 24.5% stake, and several municipal authorities own a combined 9.9%. A change-of-control covenant is attached to the issue, allowing lenders to put their bonds back to Kogas if that combined stake falls below 51%. The deal has the sovereign A2 rating from Moody's and the equivalent single-A rating from Standard & Poor's.

However, according to a source familiar with the transaction, although the covenant was "very important from a deal execution perspective", it had no impact on pricing. Investors simply insisted on that credit protection.

Among the plethora of Korean deals this year, most of which have either been explicitly supported by the government or implicitly backed by a majority stake held by the sovereign, investors identified another utility, Kepco-owned KHNP and its recent five-year issue, as the most suitable benchmark.

Yet, that issue was trading at 385bp just hours before the launch of the Kogas deal, so a 390bp re-offer spread gave investors barely any new issue premium, especially since they have come to expect a gift of as much as 25bp-30bp over the past few months.

Market participants reckoned Kogas was able to buck common practice for two main reasons: first, it is a "unique credit" in the sense that there are no other Korean gas companies, but no shortage of Korean commercial and policy banks, or power generating companies (such as KHNP); and second, Kogas's management made it clear from the outset that it only needed $500 million "for general corporate purposes" so there was no danger that the issue size would be increased and little likelihood that the company will be tapping the dollar market again this year. Kogas last issued a dollar bond as far back as 2003.

The deal came during a volatile and turbulent period for the US Treasury market, as investors worried about the global economic outlook and ditched equities and credit one minute, and in the next grew anxious about the safe haven status of a government bond market that faces huge supply in coming months.  

Price whispers during investor soundings a week before the pricing (on July 3) were as wide as 430bp, but then narrowed over the following few days to 400bp while two teams went on the road to Hong Kong, Singapore, London, Los Angeles, New York and Boston. The investor presentations were organised by joint bookrunners Bank of America-Merrill Lynch, Deutsche Bank and J.P. Morgan. Hyundai Securities was also involved in the offering as a lead manager.

The size of the total order book was just under $5.9 billion, and the bonds were distributed to 311 accounts. Investors in the United States -- some of them first-time buyers of a Korean name -- took 50% of the issue, while investors in Asia and Europe took approximately 33% and 17% respectively. Fund managers bought the bulk of the deal, or 56%, while insurance companies were allocated 21%, retail and private banks 15%, and commercial banks 8%.

The pipeline for further Korean issuance will remain open as long as funds stay cash rich; and for the moment at least, bankers reckon there is plenty of liquidity around. Government-backed National Federation of Fisheries Cooperative is due to issue soon, and Kepco plans to sell at least $500 million of bonds -- perhaps by the middle of this week. State-owned Korea National Oil Corporation has also reportedly hired six banks to arrange a dollar offering later this month.