Shinhan issues $500 million global bond

Shinhan Bank priced $500 million of three-year global bonds yesterday morning (Hong Kong time). The deal, which came on the back of a non-deal global roadshow at the beginning of this month, attracted strong demand worldwide, although a sudden weakening of credit and equity markets meant that, in the end, the terms were less generous for investors than had been intended.

According to a press release from Shinhan Bank, which is part of the Shinhan Financial Group, the "offering was swiftly executed on an intraday bookbuilding basis to cover Asia, Europe and US, with deal announcement at Asia open on Monday, June 22, price guidance at Europe open and [final] pricing at New York close on the same day".

Credit markets (and equities) have rallied in recent months because of favourable technical factors and, most of all, strong liquidity among funds. Each dip has usually been caused by the release of pessimistic fundamental data and Monday's report from the World Bank, which saw it downgrade its global economic growth forecasts, was no exception.

Equity markets worldwide fell between 3% and 3.5% during the day, the US dollar strengthened and volatility indices rose around 15%. Credit default swap (CDS) spreads widened, and the iTraxx index for investment grade bonds shifted violently. When it opened in Asia on Monday, the index was quoted at 190-195, by the New York close it had moved up to 205-209, and yesterday afternoon in Asia it was trading even wider at 213-218.

Korean credit also suffered. The country's CDS spread opened at 188-198 in Asia on Monday, but had widened to 210-215 by late afternoon yesterday. Similarly, Korea's benchmark 2014 bond, which was bid at a yield spread of 268bp early Monday, widened to 276bp; while the benchmark 10-year bond widened from 264bp to 275bp.

Such turbulent conditions inevitably made pricing and establishing fair value for Shinhan's issue a little awkward.

The bookrunners for the Reg-S/ Rule 144A issue -- BNP Paribas, Deutsche Bank, HSBC, Merrill Lynch and Royal Bank of Scotland -- together with joint lead manager Good Morning Shinhan Securities, re-offered the notes at 380bp over mid-swaps (fixed at 2.261%), which was in the middle of a 20bp range indicated earlier in the day.

The bonds pay a 6% semi-annual coupon and were sold at 99.835 to yield 6.061% to a maturity date of June 29, 2012. That translated into a spread of 430.8bp over the yield on the benchmark three-year US Treasury note.

The issue is rated A2 with a stable outlook by Moody's Investor Services, but are assigned a lower rating of A- with a negative outlook by Standard and Poor's. Like Kookmin's three-year offering on June 2, but unlike Hana's five-year deal in April, the issue is not supported by a government guarantee. It is the biggest ever international bond deal by Shinhan, and the largest senior unsecured transaction from a commercial (and privately owned) Korean bank since November 2006.

Market participants identified Kookmin Bank's three-year senior unsecured bonds, that were issued in early June, as the best reference point. The two banks are close rivals for top-dog status as Korea's leading lender; and both decided to eschew a government guarantee for their bond issues.

Kookmin's deal was originally issued at 390bp over mid-swaps, but had tightened to 350bp by Monday morning in Asia. By the time Shinhan priced at 2.30pm New York time, the bid spread had widened to 360bp, where it was still quoted by dealers in Hong Kong yesterday afternoon. Shinhan's issue was bid as low as 98.875 at Asia opening yesterday, before recovering at the end of the day to 99.5 based on the mid-point between the bid and offer spreads, or 390bp over mid-swaps. 

The intention had been to price Shinhan with what has become in recent months a standard 25bp-35bp new issue premium, but falling credit markets and rallying US Treasuries compressed that spread to just 20bp.

Nevertheless, Brayan Lai, credit analyst at French investment bank Calyon, believed that "the deal was priced well" and is likely to benefit from solid support in the secondary market as investors raise their allocations.

An Asia-based fund manager was less fulsome. He argued that "markets are grinding weaker and investors are just cheesed at the tight spreads that new deals have been coming at". He believed investors are becoming "jaded with these new issues coming at tight spreads and deals that do not leave anything on the table for them".

But the Shinhan issue attracted 182 orders worth $2.4 billion. The bulk of the paper was placed in Asia, with 67% allocated to the region, 18% distributed to accounts in Europe, and 15% to the US. More than half went to fund managers (including hedge funds), who bought 54% of the deal, while commercial banks took 26%, private banks and retail accounts 16%, and insurance companies and pension funds 4%. The remaining 1% went to "others".

Shinhan Financial Group, Korea's second biggest financial group by market value, raised W1.3 trillion ($1 billion) in equity in March, as it looked to bolster its tier-1 capital without relying on expensive funding from a W20 trillion ($16 billion) state-backed fund. At the end of that month, Shinhan Bank reported assets of W249.5 trillion and deposits of W126.8 trillion -- 15% of the country's total bank deposits.

However, in a report released on June 22, S&P warned that "Shinhan's relatively aggressive loan growth over the last few years could translate into increased credit costs in an economic slowdown". The rating agency also noted the bank's "increased exposure to the construction sector, which is under severe pressure amid recent stagnation in the residential property presale market".