With the equity markets strengthening and the problems in Europe abating, investors are feeling it's time to spend the cash that they've been sitting on since the markets started see-sawing in May. And, with that, several Asian borrowers have come to market over the past two weeks and again this week with the return yesterday of Woori Bank.
This is the second time Woori Bank has issued bonds this year after pricing a $500 million five-and-a-half-year deal in March. Yesterday, it hit the market with another five-and-a-half-year issue, this time at a slightly larger size of $600 million.
The notes pay a 4.75% semi-annual coupon and will mature on January 20, 2016. They were re-offered at 99.356 to yield 4.885%. This is equivalent to a spread of 300bp over the five-year US Treasury yield. As there is no equivalent 5.5-year Treasury benchmark, bankers looked to the most liquid on-the-run Treasury as a pricing point. In this case it was the five-year Treasury.
There has been an influx of deals with a five-and-a-half-year maturity this year as there are clear benefits to the issuers. When such deals are marketed at a fixed spread over Treasuries and then swapped back to floating rates, issuers can take advantage of the steepness of the five-and-a-half-year swap curve and potentially achieve a tighter Libor spread. And this is what Woori set out to do when it launched its new 2016 bonds on Tuesday morning.
At the time of the announcement, the existing Woori 2015 bonds were trading at Treasuries plus 285bp, which was equivalent to a z-spread of 246bp. The other comparable issue that investors looked at was the recent Korea Exchange Bank 2016 bond that was trading around Treasuries plus 300bp at the time of the announcement. This is equivalent to a z-spread of 258bp. The z-spread takes into account the present value of the cash flow of the bond when added to the yield at each point on the spot rate Treasury curve where a cash flow is received. This is different from a nominal spread calculation, which is based on one particular point on the Treasury yield curve.
By the opening of London trading on Tuesday, final guidance had been set at between 300bp and 310bp over Treasuries.
With Woori being the only issue to be launched on Tuesday and a fairly quiet pipeline for this week, the lead managers -- Deutsche Bank, HSBC, ING, UBS and Woori Investment & Securities -- were able to price aggressively versus the recent issue from Korea Exchange Bank (KEB).
When Woori priced the 2016 bonds at the tight end of guidance at Treasuries plus 300bp, the bank's existing October 2015 bonds were trading at 293bp and KEB was quoted at around 305bp.
With the new Woori bonds acting as the most liquid benchmark for the sector, other Korean bank issues tightened by 5bp to 11bp over the course of the day. This effectively re-priced the entire curve for the Korean banking sector.
Towards the end of the Asian trading session yesterday, the new bonds had tightened to 298bp. And, taking advantage of Woori's sound performance, the spread of the KEB 2016s tightened by 5bp from where it had traded at the time of the Woori pricing.
Bond investments were put on hold when the markets became unstable during the peak of the sovereign debt problems in Europe a couple of months ago. With the recent return of a more constructive backdrop, investors have been keen to put that money to work and the Woori deal attracted a healthy order book of $4 billion from 300 accounts.
"We've certainly seen stronger and more stable equity markets," said one source, adding that concerns about the European debt situation seem to have eased off with investors treating no news as good news.
Asia-based investors received 50% of the allocation. Europe took 30% and offshore US investors the remaining 20%.
In terms of investor type, asset and fund managers bought 48% of the deal. The distribution to banks and retail was evenly split, with banks taking 19% and retail 18%. Insurance and pension funds took 10% and other types of investors 5%.
With the heavy issuance at the end of last week congesting the market somewhat, Tuesday seemed to be the day to get the deal done. "It wasn't necessarily a good week to price last week," commented one banker, "and with nothing in the pipeline besides potentially PTT this week it seemed a good time to price."
Thailand-based PTT Exploration and Production is expected to price a 144A/Reg-S senior unsecured five-year bond this week. The notes have received provisional ratings from Moody's and Standard and Poor's of A3 and BBB+ respectively. Credit Suisse and Royal Bank of Scotland are joint bookrunners for the deal.
