Posco re-opened the US dollar market for Asian corporate borrowers with élan on Thursday night, as it rode the crest of a wave of bullish sentiment for US Treasuries. The $700 million five-year issue marked the first US dollar offering from an Asian corporate since Hong Kong & China Gas's $1 billion issue in July 2008.
Whispers earlier in the week indicated that Korea's biggest steelmaker would have to pay up to 9.5%, and yet, despite a rapid drop in US Treasury yields between then and launch, Posco was able to maintain its spread premium and achieve funding inside 9% -- at a launch yield of 8.95%. On Wednesday, the Federal Reserve said it would buy $300 billion in longer-dated US Treasuries, prompting a sharp rally in bond prices and hence a fall in yields.
The Regulation S/144A deal, reoffered at 99.208, pays a semi-annual coupon of 8.75% and matures on March 26, 2014. The pricing came on the back of a two-day roadshow to Los Angeles, New York, Boston, Singapore, Hong Kong and London.
The launch spread was 736.7bp over the five-year Treasury benchmark, but the yield spread immediately tightened by 50bp and at the close of business in Asia, the new Posco bonds were bid at 101.60. This might suggest that the deal could have been placed at a narrower spread. But a debt capital markets banker insists that, in this environment -- which is clearly a buyers' market -- all deals must give a generous premium to investors. Issues by two state-owned Korean policy banks, Export-Import Bank of Korea (Kexim) and Korea Development Bank, which were launched in January, had tightened by similar amounts last week.
Meanwhile, the borrower was pleased to raise the maximum amount it had registered with Korea's Ministry of Strategy and Finance. The lead managers, Citi, Deutsche Bank, Goldman Sachs, HSBC and Merrill Lynch, had originally marketed the size at between $300 million and $700 million.
Investors were persuaded by the quality of Posco -- its competitive cost base, and low-debt-to-equity ratio, which is reflected in its single-A credit rating by Standard and Poor's, and A1 rating by Moody's, says a banker familiar with the deal. Moody's recently downgraded Posco's outlook from stable to negative, but that was based more on a worldwide slump in steel demand than intrinsic problems with the Korean company. And according to one London-based fixed-income fund manager, Posco's focus on emerging markets, particularly China, rather than the more vulnerable economies of North America and Europe, is perceived as a positive. Posco is the fourth biggest steelmaker in the world.
Sovereign worries, including Korea's external debt problems and heightened military tensions with Pyongyang, were apparently not a major concern among investors. However, some were dissuaded from taking part because of the immediate negative outlook for the highly cyclical steel sector.
Still, plenty of investors were persuaded to participate in spite of such near-term concerns. The issue was more than five times subscribed, with orders from 213 accounts worth $3.7 billion. Nearly half of the bonds were placed with US accounts, while 36% went to Asia and 16% to Europe. Fund managers took the bulk at 64%, insurance companies found room for 21%, private banks 7% and the balance was placed with others.
