Korea Land priced a debut $500 million bond issue on Tuesday via joint leads Citigroup and Deutsche Bank. The government-owned group managed to push the 10-year deal through despite deadened demand ahead of the next FOMC meeting in June and the postponement of a subordinated debt deal for the National Agricultural Co-Operative Federation (NACF) the day before.
Pricing of the A3/A- rated deal came at 98.347% on a coupon of 5.75% to yield 5.972% or 125bp over Treasuries. At pricing, this equated to a 9bp premium to fellow government-owned agency Korea Highway, whose April 2014 deal was trading at 116bp over Treasuries.
Korea Land's deal represents a new pricing reality for Asian borrowers, which now face the prospect of rising interest rates and the need for a new issue premium. By contrast, Korea Highway was able to secure pricing nearly 20% cheaper in coupon terms when it last came to the dollar market in early April.
Its April 2014 deal was priced at 99.018% on a coupon of 4.875% to yield 5.001%. In coupon terms, this was 87.5bp more cost efficient.
Nevertheless, Korea Land was able to accumulate an order book of $900 million, which was quite an achievement given the recent risk aversion by investors burnt by the recent sell-off. The lead managers were also, no doubt, happy to receive 30bp in fees rather the recent low precedent of 20bp to 25bp paid by Korean government-owned issuers.
Observers report a concentrated order book of about 45 investors, of which about a dozen came from Korea.
By geography, the deal had a split of 65% Asia (of which 62% derived from Korea), 20% US and 15% Europe. By investor type, insurance funds accounted for 29%, pension funds and government agencies 22%, funds 23%, banks 19% and retail 7%.
Specialists believe markets are still conducive to select credits and believe Korea Land was able to clear because it had a clear anchor among Korean accounts. "Because this was a debut deal, a number of Korean institutions had open lines," says one participant. "Being a senior deal also helped."
On a stand-alone basis, specialists add that Korea Land has fairly strong credit stats. The group is the biggest developer of affordable residential and industrial land in Korea. At the end of 2003, it ran net gearing of 24%, net debt to capitalization of 20% and operating cash flow to EBITDA of 0.7 times.
A day earlier, NACF decided to postpone its deal after it failed to generate enough momentum. From the outset, the A3/BBB+ rated group had said it would only price a lower tier 2 deal if conditions remained in its favour.
Under the lead of ABN AMRO, Credit Suisse First Boston and HSBC, the group had managed to build up an order book of just over $275 million by the end of last week, but saw orders slip away over the weekend. By Monday, when the decision was taken to pull the transaction, there were about $250 million orders within the indicative price range of 120bp to 125bp over Libor.
As one observer concluded, "The whole episode was very frustrating really. It was like dealing with a dead calm. Investors just weren't interested in coming to market."
The situation was probably not helped by the fact that Korea sub debt spreads have been among the most volatile cross-over credits in Asia, bouncing out by up to 100bp in Treasury terms over the past couple of months.
At the time of pricing IBK's March 2014 bond callable in 2008 was trading at 113bp over Libor, some 12bp tighter at the wide end of the range. In the senior debt markets, NACF typically trades at a 15bp to 17bp premium.
