Issuing bonds with a five-and-a-half year tenor seems to be the flavour of the year for Korean and Indian banks. On Wednesday, Korea Exchange Bank (KEB) priced a $500 million bond, closely followed by India's ICICI Bank, which printed a benchmark 144A/Reg-S deal in the early hours of this morning.
From the beginning of April to late May, six Korean banks and two Indian banks launched bonds with five-and-a-half year maturities. During that period, the six-month extension beyond five years on a steep US treasury yield curve gave investors what they wanted -- a wider spread and a higher coupon.
But, by early June, swap terms into domestic currencies looked less attractive for issuers. Recently, however, it has made commercial sense once again -- for both borrower and investor.
"That arbitrage between five and five-and-a-half years on the yield curve is worth about 15bp and both issuers and investors get to share it," said one banker.
KEB's fixed-rate senior unsecured bonds pay a semi-annual coupon of 4.875%. They were re-offered at 99.32 to yield 5.018% to a maturity date of January 14, 2016. The yield was the highest for a five-and-a-half year issue that has priced this year.
In order to see where relative value could be attained, investors looked to Hana Bank's recent $500 million issue, Shinhan Bank's $700 million bond and Woori Bank's $500 million 2015 securities. All three banks are rated one notch higher than KEB, which was assigned an A2 rating by Moody's and BBB+ by Standard and Poor's -- hence the higher yield.
Also, US Treasury yields have fallen since Shinhan and Hana completed their deals earlier this year, and risk aversion has increased.
"Although you have a low Treasury yield versus when Shinhan Bank and Hana Bank printed, the compression of the Treasury yields was more than offset by the widening of the credit spreads in the broader market," said a source.
KEB's deal was formally launched just after Asian markets opened on Wednesday morning with guidance set within the area of Treasuries plus 337.5bp. By 2.45pm the same day, lead managers Bank of America Merrill Lynch, Citi, HSBC and Morgan Stanley revised the price to within the range of 325bp and 330bp.
At the time, the comparables of Shinhan, Hana and Woori were all trading around Treasuries plus 270bp. In the end, the bonds came to market at 325bp over the equivalent five-year Treasury yield, which was over 50bp wide of the comparable issues.
"Taking into account the ratings differential plus the fact that this is a much smaller bank, investors demanded a reasonable amount of extra premium under these market conditions," said one banker. "And 325bp was the tightest we could price without underperforming in the secondary market."
The final order size was over $2 billion across 195 accounts. The bulk of the issue was placed in Asia, with 82% distributed to investors in the region; European accounts bought the remaining 18%. Given this was a Reg-S deal there was no allocation to US investors.
By investor-type, conventional fund managers took 53% of the deal, commercial banks bought 22%, private banks 13%, insurance funds 6% and other types of investors 6%.
Credit markets are currently volatile, and investors have raised their cash levels, according to bankers. But, a generously priced issue by a well-regarded borrower will still attract buyers.
Kookmin Bank is poised to be the next Korean bank to come to market, and other Korean issuers are preparing deals too, such as the quasi-sovereigns Korea Housing Finance Corporation and the National Agricultural Cooperation Federation.
By midday Thursday, KEB's bonds were trading at 310bp.
