Lotte Shopping entices investors with $400 million bond

Lotte Shopping last week raised $400 million from a five-year bond issue, which attracted a lot of interest due to the scarcity of private sector corporate bonds from Korea as well as single-A rated issues in Asia in general. Lotte is a market leader in both department stores and supermarkets in Korea, and the country’s third largest operator of convenience stores and hypermarkets, making it an attractive retail industry play in Korea where high entry barriers are benefitting the incumbents.

Having attracted total demand of $2.25 billion, the bonds tightened by 10bp on a spread basis in the secondary market on Friday, leading some observers to argue that they had traded through fair value and are now looking expensive. However, Shinhan Bank’s 5.5-year bonds – issued in a $500 million deal earlier in the week – have rallied about 20bp, suggesting investors are positive about Korean credits. Aside from the policy banks, there have been few dollar deals from Korea so far this year, although issuers -- primarily the banks -- are starting to make a move.

Lotte’s Reg-S deal, which is a straight five-year issue with no call, was priced late Thursday at a yield spread of 180bp over Treasuries, or at the tight end of the final guidance of 180bp to 185bp. The bookbuilding opened early Thursday Hong Kong time (the final day of a two-day roadshow to Hong Kong and Singapore) with a whisper suggesting the yield would be “in the high 100s”. This was turned into a formal guidance in the area of 190bp by early afternoon and further revised to 180bp to 185bp in the early evening as the order book kept building.

The final spread over Treasuries translated into a yield of 4.025%. The semi-annual coupon was fixed at 3.875% and the bonds were reoffered at 99.327 to push the yield above 4%. BNP Paribas and Citi were joint bookrunners.

One source said there had been some concern that the bookrunners may have squeezed the pricing too much, even though the deal was priced in between oil refiner GS Caltex and steel manufacturer Posco, which were viewed as two key benchmarks. During marketing, the GS Caltex 2016s, which are rated two notches below Lotte at Baa2/BBB (Moody’s/S&P), were quoted at a spread of 190bp-200bp over Treasuries. Meanwhile, the Posco curve implied that a new five-year would come at a spread of around 160bp. Posco is rated at A2/A (Moody’s/S&P) which is one notch above Lotte’s A3/A- ratings from Moody’s and Fitch.

Notably, however, Lotte did come within 20bp-30bp of the recent 5.5-year deals issued by higher-rated Korean policy banks Industrial Bank of Korea and Korea Development Bank.

Given the aftermarket performance, the pricing concerns seem to have been unwarranted. That said, Diksha Gera, an analyst on Nomura’s sales and trading desk, estimated that the bonds tightened from a z-spread of 163bp at launch to 152bp by Friday afternoon, which she argued was below the fair value at 160bp. Hence she sees limited upside from current levels. The z-spread is used to measure the credit spread without the distortion of a yield-to-maturity calculation.

The fact that the company chose not to be too aggressive on size would have helped support a tighter pricing. Initially announced as a benchmark deal capped at $500 million, the bookrunners let investors know during the bookbuilding that the final size would be between $400 million and $500 million. And despite an order book of more than $2 billion, they settled for a deal at the bottom end of that range.

In light of the busy issuing calendar in the Asian market in the first few months of this year – this past week alone saw five other fixed-rate deals price – and the impact on the secondary market from external events like the Japan earthquake and rising interest rate expectations, it appears the banks and the issuers are getting more disciplined about size. And since the pipeline is showing no signs of slowing down, that can only be positive.

Lotte attracted a total of 132 investors to its offering. About 91% of the deal went to Asia-based accounts, while European investors bought the rest. In terms of types of investors, fund managers and asset managers combined took up 44%, banks and financial institutions 33%, public institutions 10%, insurance companies 7% and others 6%.

These investors, and those chasing the bonds in the aftermarket, showed little concern about Lotte’s aggressive expansion through acquisitions, in Korea and internationally, which Nomura’s Gera pointed to as a key issue surrounding the credit. “Current ratings have limited room for further aggressive acquisitions, and this exposes the bonds to event risk should there be aggressive capex with debt-funded acquisitions, eventually resulting in a ratings downgrade,” she said. Lotte, which is also involved in e-commerce and TV-shopping, is planning to buy nine new hypermarkets in Korea, 15 in China, four in Indonesia and one in Vietnam this year alone.

Moody’s acknowledged that the assumption of further debt to pay for its expansion could put pressure on Lotte’s ratings, but said that “despite considerable weakening due to recent acquisitions, its key credit metrics -- projected debt/Ebitda of below 3 times and retained cash flow/net debt of about 26%-30% -- should remain consistent with the (current) rating over the next year or two, although at the weak end of the rating level”.

Photo provided by AFP.