After a hard fought competitive bidding process, the two houses were mandated late on Friday for a re-opening of the Korea Development Bank's (KDB) recent $500 million dollar benchmark, with launch expected either Tuesday or Wednesday pending the completion of due diligence.
The tap shows every sign of being the most difficult transaction to execute in recent Asian bond market history thanks to the combination of a tight hard-underwritten bid, low fees and the market risk engendered by the delay between mandate and pricing. Fees on the deal have not yet been revealed, but the winning bid is said to have come at 3bp to 5bp over a secondary market bid/offer spread of 95bp/90bp over Treasuries, equating to a bid yield of 5.46% and cash price of 99.135%.
At this level, there is little room to manoeuvre and it will only take a marginal movement in spreads for the deal to become a loss leader. In their favour, both lead managers are large traders of Korean bonds in the secondary market and are thought to have used their active trading books to build up sizeable short positions prior to the issue of the RFP (Request for Proposals) last week. Key to spread movement over the next few days, however, will be the trading strategies of other banks that may also have set up short positions in anticipation of winning the deal and may now release that paper back onto the market pressurising current spread levels.
A second factor in the leads' favour is the size of the issue. Having asked for proposals on a prospective $250 million to $500 million tap, KDB is said likely to opt for the lesser of the amount, thereby reducing some of the potential overhang of the new supply coming to the market.
Placement, on the other hand, will be complicated by the recent closure of the won/dollar arbitrage, which has made it less attractive for onshore funds to buy dollar-denominated paper and may again pressurise spreads that have largely traded through their bonds' respective ratings because of the strength of the onshore bid.
In the place of domestic accounts, Korean experts say it will be more important to target traditional buyers of Korean bonds such as European banks, which had been active prior to the financial crisis and are now starting to re-build sizeable positions as the Korean sovereign rating pierces the single-A threshold again.
Indeed, many fixed income analysts have been saying that although the whole Asian credit universe looks overvalued, there is no sign that the technical factors which have pushed spreads to such tight levels, being reversed any time soon.
For KDB, the re-opening marks the onset of a fairly active borrowing programme for 2002. The A3/BBB+ rated bank hopes to raise about $2 billion this year issuing a new benchmark in yen, dollars and euros.
