Republic of Korea has raised a $2 billion dual-tranche multi currency bond, the first of its kind since 2006, as investors rush to hold quality credit.
The SEC-registered offering consists of a $1 billion 30-year fixed-rate tranche — Korea’s first ever for that duration — and a €750 million ($1 billion) 10-year also fixed-rate note, according to a term sheet seen by FinanceAsia. The bonds have coupons of 4.125% and 2.125% respectively.
Numerous reasons spurred the sovereign to issue the 30-year bond, including the need to set a new benchmark, investor diversification and a need to refinance an upcoming $2.5 billion worth of debt maturing this year, Tae Sik Yoon, director of the international financial policy division at ministry of strategy and finance for Korea, told FinanceAsia. He added that the longest tenor Korea has ever issued was a 20-year dollar bond back in 2005.
“We want to set the benchmark for a much longer maturity for the private corporate sector and public institutions,” said Yoon in a telephone interview. “Also, the investor base is slightly different for the 30-year space and we would like to diversify our investor base to include longer duration investors such as pension funds and insurers.”
The note comes shortly after the sovereign completed its global roadshow in London on May 28, according to sources familiar with the matter. The fixed-income investor meetings initially began in New York on May 20, and included trips to Boston, Paris, Amsterdam and Frankfurt.
Yoon said that the Republic of Korea has completed its funding plans for this year, but if there’s an urgent need to inject further liquidity into its market, the institution could return with another international bond.
The sovereign has another €500 million worth of debt expiring in 2015, but hasn’t firmed any concrete refinancing plans as of yet and will look into it early next year, he added.
Developed market status
The Republic of Korea’s bond also comes at a time when Korean paper is deemed by many as a developed market investment compared to emerging markets, similar to that of Japan’s status.
Korea’s strong rating of AA- by Fitch are underpinned by its fundamental strengths, which include a resilient economy and a robust macroeconomic policy framework in which sustained fiscal discipline and a flexible exchange rate remain intact, according to the rating agency in a note published on Tuesday.
“These factors leave Korea well positioned to cope with the risks of high household debt, and a volatile global financial environment,” said Thomas Rookmaaker, credit analyst at Fitch.
Moody’s and Standard & Poor’s have rated the sovereign Aa3 and A+ respectively.
The level of Korea's household debt has risen to another record high, touching $1 trillion at the end of March, up $3.3 billion from the previous quarter, according to the Bank of Korea.
The last time the Korea raised a dual-tranche multi currency deal was in 2006 when it raised a $500 million 10-year bond and a €350 million 15-year note, according to Dealogic data.
Tight spread
The Republic of Korea’s 30-year dollar tranche was announced during Asia early afternoon on Tuesday at an initial guidance of Treasuries plus 95bp area, and was subsequently revised down to Treasuries plus 75bp during New York morning hours for a $1 billion offering, according to a source on the deal. The dollar note ultimately priced at the tight end of final guidance at Treasuries plus 72.5bp.
A source familiar with the deal said that the spread differential between Korea’s 10- and 30-year offerings is one of the tightest globally. The sovereign’s existing dollar paper expiring in 2023 was trading at a G-spread of Treasuries plus 60bp, implying a spread of merely 12.5bp between both tenors.
Syndicate bankers were comparing Korea’s curve to other sovereigns including Chile, Qatar and Brazil, but the spread differentials between their 10- and 30-year bonds range from as tight as 25bp to as wide as 66bp, added the source.
Launched at the same time as the dollar tranche, the 10-year euro bond had an initial guidance of mid-swaps plus 65bp to 70bp. The guidance was revised to mid-swaps plus 60bp area during London morning hours and was finally priced at mid-swaps plus 57bp.
Overwhelming order book
The Republic of Korea’s transaction received a total order book of more than $8 billion for both tranches — $4.5 billion for the dollar offering and €3.1 billion for the euro note — from more than 350 accounts.
“We reconfirmed that overseas investors continue to be very enthusiastic about Korean paper,” said Yoon.
US investors accounted for nearly half of the dollar issuance, followed by Asian investors with 41% and Europe 11%, while for the euro offering, UK investors subscribed to a third of the paper, followed by Germany and Austria with 23%, France with 13%, Asia with 11%, Switzerland with 5% and other parts of Europe with 15%, according to the term sheet.
Both tranches received good order books from high quality institutional investors. For the dollar bond, asset managers subscribed to more than half of the notes, followed by insurers with 33%, financial institutions with 5%, and central banks and others with 7%. Meanwhile, fund managers accounted for 63% of the euro offering, insurers and pension funds took 23%, banks and private banks took 5% and others 10%.
Bank of America Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Korea Development Bank and Samsung Securities were the joint bookrunners of the transaction.
