Marketing began yesterday for a $350 million primary collateralized bond obligation (CBO) backed by a portfolio of bonds and warrants issued by Korean small and medium-sized enterprises. Hannuri Investment & Securities, a domestic Korean house, is acting as arranger and joint lead manager on the transaction with BNP Paribas as joint lead and sole-bookrunner for the $266 million of rated senior notes. It is the first ex-Japan Asia securitization mandate that BNP has been involved with.
According to bankers familiar with the mandate, BNP expects to price its part of the issue today, and close books within the next couple of days.
The transaction will be issued through Coro Voltin Fund, a special purpose vehicle registered in the Cayman Islands. At closing, the SPV will purchase from Hannuri a portfolio of 122 US dollar denominated bonds issued by SMEs with a face value of around $332.5 million and warrants with notional value of $16.3 million. Buyers of the warrants are entitled to purchase shares in the SMEs that issued bonds.
At the same time that these bonds are purchased, the SPV will issue the two rated tranches as well as approximately $84 million of unrated securities. The rated notes have been split into the $110 million A1 piece, which has a three-year bullet maturity, and the $156 million of A2 bonds, which have five-year bullet payments.
Fitch and S&P have rated both tranches A/A-, at the Korean sovereign level, because they are enhanced by an unconditional guarantee from the Small Business Corp (SBC). The SBC is a government-owned financing agency for SMEs with consolidated assets of W13.2 trillion ($10.8 billion).
According to one syndicate official, indicative pricing for the three-year piece is 95bp over Libor and 125bp over for the five-year notes. "The three year piece is heavily oversubscribed," he says. "There are some European accounts that need an extra day or so to get credit approval, at which point decisions will be made on the allocations. The European investors are not just Asian subsidiaries based in Hong Kong and Singapore, but also some based in continental Europe. They are looking to get Korean exposure, as long as they can get some pick-up.
"Spread levels are quite tight across Asian markets, but we're fortunate this has a nice structure," the official adds. "It has dollar flows so is nice and easy, especially for banks, and the spread - especially compared to the Korean sovereign is very appealing."
Another banker believed the SBC's involvement was critical in ensuring investor interest. "The primary strength of the deal is perhaps not the quality of the assets going in, but the nature and source of the credit enhancement," he says. "This deal offers significant protection to investors. The rated notes are considered deliverable obligations, which means bondholders can hedge risk by buying protection on the SBC."
Primary CBOs have been widely issued in the domestic Korean bond market as a means for SMEs to access term funding at attractive rates, but Coro Voltin is only the third cross border offering.
There was some debate over which transaction came out first, but last December saw CSFB arrange a $250 million deal via the Korea Technology Guarantee Fund SPV, while the $285 million Koromas Fund issue was put together by ADM Capital, Tony Yang Investment, TD Securities and the Korean Development Bank.
