In what is shaping up to be one of Asia's fastest mandate selection processes, the Korean government is expected to award two investment banks joint books for a $1 billion 10-year global bond on Wednesday morning.
The decision should come just one day after six shortlisted banks submit hour-long presentations to a specially convened committee of Ministry of Finance (MoFE) officials, academics and independent policy advisors. Although the committee has been deliberately constructed to ensure an even handed approach, many market participants, nevertheless, expect Goldman Sachs to win one of the slots since the bank has been one of main the driving forces behind the government's decision to issue a new sovereign bond in the first place. The other five shortlisted banks are said to comprise Barclays, Deutsche, JPMorgan, Morgan Stanley and Salomon Smith Barney.
Launch is expected to take place towards the end of the first quarter and government officials are already talking up hopes that pricing will benefit from the likelihood of new rating upgrades. Korea is currently rated A- by Standard & Poor's, having been upgraded one notch in July 2002 and moved to positive outlook in the autumn. Moody's rates the country A3, having last upgraded the sovereign by two notches in March 2002.
However, the swing factor is likely to be North Korea and many independent observers believe the situation will remain unresolved by the time Korea approaches the international markets. In a recent statement, the Bank of Korea also said that the ramifications of North Korea's nuclear programme mark the single biggest threat to the Korean economy in 2003. The central bank is currently forecasting GDP growth of 5.7% in 2003, down from 6.2% in 2002.
A number of analysts are also arguing that the country will move from a current account surplus to a deficit in 2003 on the back of rising oil prices and record high imports. On the plus side, the country has been praised for its fiscal flexibility and foreign exchange reserves stood at a record high of $118 billion at the end of November. This compares to just $30 billion when the Republic made its one and only foray to the international bond markets in April 1998.
In what represented one of the most crucial comeback bonds in Asian history, the sovereign raised $4 billion from a twin tranche bond issue that still marks Asia's largest. Led by Goldman Sachs and Salomon Smith Barney, the then BB+ rated sovereign issued $1 billion of March 2003 paper and $3 billion of March 2008 paper. The former carried an issue price of 99.198% and coupon of 8.75% to yield 345bp over Treasuries, while the latter was priced at 99.647% on a coupon of 8.875% to yield 355bp over Treasuries.
Proceeds from the new bond will be used to re-finance the March 2003 as it comes due, while the March 2008 bond will provide a basic pricing benchmark. This latter tranche was trading yesterday at 122.1% on a yield of 4.16% or Treasury spread of 118bp. The other main benchmark will be the Korea Development Bank's November 2012 bond, trading yesterday at 101.87% to yield 5.25% or 123bp over Treasuries. KDB also has a November 2007 bond, which is six months shorter than the sovereign's March 2008 and eight basis points wider.
Market participants say one of the main tests will be whether the Republic can price inside of its major policy bank. Bankers consider this likely given the benchmark status of the new deal and its rarity value. When news that the sovereign was considering a new bond deal broke last autumn, many bankers were extremely surprised given that KDB has always fulfilled the role of sovereign proxy and usurping it could only pressurize its considerable credit curve. However, government officials have been at pains to point out that the new sovereign deal is again a one-off and is primarily viewed as the kind of longer-term benchmark for corporate Korea that KDB's shorter-term funding programme was unable to provide.
