According to market sources, the additional paper was well received by investors and the bonds tightened by up to nine basis points on a spread over Treasuries-basis in secondary trading yesterday versus the pricing on Tuesday night. The bonds, which mature in 2013 and pay a semi-annual coupon of 5.375%, were priced at 97.813 for a yield to maturity of 5.9125%. This represented a spread of 284.76bp over five-year Treasuries and a re-offer premium of about 25bp-30bp versus the 255bp-260bp spread where the Korail bonds traded just before launch. The yield translates into a spread of 188bp over mid-swaps, versus about 156bp prior to the deal.
The re-offer premium was at the low end of what even European investment grade names need to offer for similar re-openings and one market participant also noted that ôany deal that can get done in the current environment and trade well in the aftermarket must be perceived as a good oneö. ôThe transaction shows there is demand for high-quality names and bodes well for the sovereign,ö the participant adds.
KorailÆs initial issue in May was priced at a spread of 237.7bp over Treasuries for a yield of 5.459%. The bonds initially tightened but have widened out again amid continued volatility in underlying rates. However, Korail has outperformed the iTraxx investment grade index since launch.
The railway operator went out with an offer to sell between $150 million and $200 million of bonds after the close of Asian trading on Tuesday, and thanks to the strong demand was able to raise the full amount. The additional money will be used for general corporate purposes. Some market participants say the bonds were offered to investors at a fixed yield of 5.9125%, although others say the initial offer was for a spread of about 30bp over the outstanding bonds.
The demand was partly a function of a lack of new debt issues overall with only two other international deals in Asia since the beginning of July, but KorailÆs quasi-sovereign status and the fact that it is an infrastructure play also fits well in with what investors are looking for amid the continuing volatility in the international fixed-income markets. As the sole operator of conventional and high-speed railways in South Korea, the company has a strong business and stable cash flows. It is also 100% government-owned.
Indeed, sources say the re-opening of the 2013 bonds was prompted by reverse inquiries, or at least very strong indications of demand from certain key investors. Both deals were lead managed by Citi, HSBC and Morgan Stanley.
ôThis is good name that people got comfortable with fairly quickly,ö says one banker not involved in the transaction.
MoodyÆs, which rates Korail A2, said in a note yesterday that the companyÆs credit metrics are weak for its rating due to ôinadequate railway tariff levels and a large legacy debt it assumed from Korea High-Speed Rail Construction Authorityö.
However, the rating reflects KorailÆs ôdistinct policy role and high operational integration with the Korean government, as well as the strong support from the government as evidenced by the regular financial assistanceö, said Chris Park, Moody's lead analyst for Korail. ôThese factors suggest that Korail's credit profile is closely linked to that of the government.ö
But MoodyÆs also expects the company to improve its financial profile considerably over the medium- to long-term upon receipt of approximately W8 trillion of proceeds in instalments from the recent sale of its railway maintenance site in Yongsan. The company is rated A by Standard & PoorÆs.
Demand for the bonds was driven primarily out of Asia, but the buyers also included real-money US accounts. Based on allocations, some market participants estimate that the deal was close to 2.5 times covered, which is quite impressive given that the deal came in the middle of the holiday season for most fund and asset managers. The original $300 million bond in May was about five times covered.
But while August is perhaps not the ideal time to launch a new issue, observers say it was the right move to get its deal done before the sovereign which is expected to launch sometime in the second week of September. According to bankers, there is also quite a significant pipeline of other Korean deals ready to come to market after the sovereign and by getting its offering out of the way now, Korail will have avoided what may well become a fight for investor attention û a situation which in the current market environment could quite easily result in a need for more generous pricing.
There had been some indication that the Korean Ministry of Finance would not approve any international bond issues in the week before and after the sovereign and some market participants said they were surprised that Korail was allowed to issue now. However, others say a tap of only $200 million without a roadshow is unlikely to have much impact on the overall market and the ministry is thus unlikely to have seen a need to delay it.
By choosing to tap the earlier issue, Korail has been able to raise $500 million in just over three months at a time when a challenging market for Korean issuers has seen most deals this year capped at $300 million to $400 million. One reason for this is the large number of deals from Korea. So far, Korea Midland Power, Korea Southern Power, Hyundai Capital, Export-Import Bank of Korea, GS Caltex, Woori Bank and SK Energy have all issued bonds outside their home market.
Swire used a similar tactic for its 10-year investment grade bond in April which was first upsized to $400 million from $300 million and then tapped for another $100 million a week later following reverse inquiries. And given the continued volatility in fixed-income markets and uncertainty about interest rates, more issuers may be inclined to choose the same route. However, if investors start to focus on the tap risk and demand larger new issue premiums, the pricing benefits from splitting the issuance into two could be quickly reduced and the use of taps could make the primary market even more challenging.
The Republic of Korea is expected to issue about $1 billion worth of bonds û its first offering in the international markets since December 2006. Barclays Capital, Goldman Sachs, HSBC, Lehman Brothers, Samsung and UBS are said to be working on the deal.
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