Korea Western Power sold a capped $300 million five-year note on Monday, competitively pricing the deal hot on the heels of its recently attained ratings upgrade from Moody’s.
It was the first Korean corporate bond in nearly two months and at 92.5bp over Treasuries was priced 17.5bp tighter than its initial target, according to a term sheet seen by FinanceAsia. The yield is 2.734%.
According to sources close to the transaction, the proceeds of Korea Western’s bond will be used for general corporate purposes, including capital expenditure, working capital and refinancing.
Korea Western is one of Korea Electric Power’s (Kepco) six wholly owned generators, which together produces approximately 90% of the country’s electricity. The six power generation companies are Korea Hydro and Nuclear Power, Korea East-West Power, Korea Midland Power, Korea South-East Power, Korea Southern Power and Korea Western Power.
On August 28, Moody’s upgraded Kepco and its subsidiaries to Aa3 from A1. Korea Western is also rated A+ by Standard & Poor’s.
In light of the group’s systemic importance, the credit profile of each of its generators is closely linked to that of its parent and the Korean sovereign.
Moody’s assessment is based on the Korean government’s intention to maintain tight ownership and control over the important industry. The government will likely strengthen the competitiveness of the power companies through improvements in management efficiency rather than through privatisation-led competition.
“The rating also takes into account Korea Western’s strategic importance as one of the major power generators in Korea, accounting for around 10% of the country’s total power generation capacity at end-June 2014,” said Mic Kang, a Moody’s Vice senior analyst.
The Republic of Korea, meanwhile, is rated Aa3/A+/AA- by Moody’s, S&P and Fitch respectively.
Too tight a price?
While credit analysts say that fair value for the bond is around Treasuries plus 90bp based on recent Korean US dollar pricing trends, a pricing of less than Treasuries plus 95bp is not too attractive.
“We do not see too much upside at this time with US Treasury yields on the rise, Chinese data trending weaker and the US dollar primary pipeline building with Korean issuers being the most active,” said Mark Reade, Asian fixed income trader at Mizuho Securities.
“Even if markets do soon shrug off today’s weakness, with Korea Hydro and Nuclear Power currently on the road we sense that it won’t be too much longer before investors have another opportunity to reload on Kepco exposure,” he added.
Ten-year US Treasury yields increased by 15bp last week and by 26bp in the past fortnight to trade around 2.61%, according to Bloomberg data.
Korea Hydro and Nuclear Power has mandated Bank of America Merrill Lynch, Deutsche Bank, HSBC, JP Morgan and The Royal Bank of Scotland to arrange a series of fixed income investor meetings in Europe and Asia, which commenced on September 8. A transaction may follow subject to market conditions.
Comparables
The closest comparables for Korea Western’s new bond is Korea Midland Power and Korea National Oil’s outstanding five-year notes expiring in February and January 2019 respectively, which were both trading at a G-spread of 85bp prior to the announcement of the notes, according to sources familiar with the matter.
The Republic of Korea’s existing notes maturing in April 2019 were also used as comparables, and were trading at a G-spread of 50bp.
The last Korean corporate to raise a dollar-denominated bond was Kepco in July, when it raised a $100 million 15-year note. According to Dealogic data, Korean borrowers have raised a total $23.8 billion G3 bonds year-to-date, a 35% increase from last year’s volume during the same period.
Barclays, BofA Merrill Lynch and Standard Chartered were the joint bookrunners of Korea Western’s new note, which was issued under the firm’s existing $2 billion global medium-term note programme.
