Korean loan margins inch ever lower

ABN AMRO, Barclays Capital and Commerzbank have been mandated to arrange a $200 million one-year deal for Woori in what will mark a debut borrowing for the Korean banking group. Pricing on the deal reflects the incredible shrinkage which has been seen in loan margins this year and carries a headline spread of 10bp over six-month Libor and an all-in of 19bp.

Many bankers describe the pricing as ludicrous and believe that it may end up being under-subscribed even though syndication is being limited to relationship banks.

Market participants argue that had Woori Bank decided to tap the Hong Kong dollar loan markets, it would have had to pay a spread at least 10bp more than Kookmin Bank, which raised HK$800 million earlier this month. Kookmin has a rating at least two notches above Woori's theoretical level and priced its one-year deal at 13bp over Hibor. Led by HSBC, the deal had an all-in on 22bp over Hibor, equivalent to 16bp over Libor.

However, some observers argue that Woori is a much sought-after name in the loan markets and enjoys a good reputation among lenders. Moreover, the comparison between the present borrowing and Kookmin's loan-style FRN is not fair as the two are totally different structures. Without doubt this is a relationship-defining deal and the level of interest and participation will be revealed when the deal is signed around the last week of July. There is a possibility of the deal being upsized, should there be enough interest, which is likely to be from offshore branches of Korean and European banks.

Woori Bank earned net profits of around KRW300 billion last year, ranking second behind Kookmin Bank. Woori Bank is the flagship unit of Woori Finance, the second-biggest financial institution in Korea after Kookmin Bank in terms of assets. Woori Finance listed on the Korea Stock Exchange (KSE) earlier this week and includes Woori Credit Card, Woori Asset Management and other financial companies in its stable. Woori Credit Card raised around $500 million through a cross-border securitisation issue last month. That deal saw a 'who's who' of banks in Asia bidding aggressively for the mandate.

In its previous incarnation as Hanvit Bank, the borrower tapped a dual-tranche loan in April at a spread of 25bp over Libor for a $100 million one-year tranche and 35bp over Libor for a two-year tranche of similar amount.

On the other hand, another deal from the banking sector in Korea has met with relative success. Korea First Bank (KFB) has upsized its one-year loan from an original size of $80 million to $100 million following the completion of general syndication. Led by arrangers Sumitomo Mitsui Banking Corporation (SMBC) and Standard Chartered, the loan was priced at a spread of 20bp over Libor. The final allocations are shown in the table below:

The transaction is a refinancing of KFB's $100 million deal arranged in May last year that paid a margin of 45bp over Libor. More recently in February this year, KFB borrowed $80 million through a one-year loan at a margin of 30bp. Spread levels on loans raised by Korean credits have generally halved in the last year due to the improved health of the financial sector and incredible competition to win deals.

KFB is 51% owned by KFB Newbridge Holdings, 46% by Korea Deposit Insurance Corporation (KDIC) and 3% by the Ministry of Finance & Economy. KFB has received widespread interest from other players in the Korean financial services sector with several parties having approached Newbridge Capital and KFB for strategic alliances and mergers. As at the end of March 2002, KFB's Tier I capital ratio stood at 8.65% with Tier II ratio at 5.52%.