Lead managers ABN AMRO and Lehman Brothers finally priced a $150 million Reg S deal for Korea Western Power (Kowepco) on Friday, a week later than the market was originally anticipating. Virtually all market participants believe the deal brings 2002 to a dispiriting close and for the five gencos lined up behind it, pricing marks an inauspicious debut for a new issuance sector.
At the outset, the deal had been expected to price about 10bp behind the Korean Electricity Power Corporation's (Kepco) September 2007 bond, which has been fairly range-bound around the 126bp level for the past two weeks and was trading at this level on Friday. However, in a sign that the deal was not proving easy to sell, indicative pricing came out at the 140bp to 145bp level and final pricing at 165bp over, a 40bp premium.
Final details comprise an issue price of 99.842% and coupon of 4.625% to yield 4.66%. Co-managers are Daiwa, Samsung Securities and UBS Warburg.
The deal's difficulties are further underlined by the presence of only 13 investors in the final order book. By geography there is said to be a split of 50% Korea, 9% Japan, 15% Hong Kong and 26% rest of Asia and Europe. By investor type, banks took up 54%, asset managers 32% and insurance companies 14%.
To be fair to the lead managers, virtually all recent Korean deals have been tough to execute as the five-year sector has become completely saturated with paper. In absolute coupon terms, the deal also stands up slightly better as US Treasuries have come down from 3.30% at the time the deal priced from 3% when it started roadshows.
There appear to be five key reasons why the deal proved difficult. Firstly, aside from the fact that the primary market has become saturated, the secondary market has ground to a standstill.
As one banker explains, "Trading accounts have become completely inactive, so secondary market liquidity has completely dried up. But this means that Kowepco was able to attract the kind of investors it was looking for - buy and hold, long-term accounts."
Secondly, investors are fully aware that there will be a lot of issuance from the sector next year and while Kowepco should have enjoyed a first mover advantage, it did not have a lot of bargaining power. Thirdly, there is an issue with liquidity, as none of the deals appear to be that large. Fourthly, rival bankers say there was an issue with secondary market support. Fifthly and perhaps most importantly of all, some investors believe the Kowepco may be the next genco to be privatised by the government.
So should it have waited until next year? The BBB+ rated credit has set a high entry barrier for its successors to grapple with, but as supporters argue there is a heavy pipeline building up next year and market conditions may prove just as demanding at the beginning of 2003.
It is also the case that while Kowepco has a one notch lower rating than the sovereign from Standard & Poor's it has an implied two-notch or possibly three-notch lower rating from Moody's. This is because while Korea is currently rated A3/A-, Kepco is rated Baa2/A-.
Many are now hoping that Korea Hydro and Nuclear Power (KHNP) will be able to set the market back on its feet when it launches a $250 million issue via Deutsche Bank and JPMorgan early next year. In its favour, KHNP will never be privatized by the Korean government because of its strategic national importance and is therefore rated by Moody's at the same level as Kepco. The genco is also three times the size of some of the other gencos in terms of generating capacity.
The current capacity of each of the gencos runs as follows: KHNP 15,250MW; Korea East West Power (Kewespo) 7,500 MW; Kowepco 7,346MW; Korea Midland Power (Komipo) 6,693MW; Korea Southern Power (Kospo) 5,765MW and Korea South East Power (Kosepco) 5,565MW.
Kowepco sits thirds in the rankings behind Kewespo, which is the first genco to be privatized with UBS Warburg acting as privatization advisor to the company and JPMorgan to Kepco. With the exception of KHNP all the gencos were established with more or less the same EBITDA earnings and debt levels.
There are, however, slight differences and in terms of EBITDA, Kowepco ranks four out of five with first half earnings of Won326.6 billion. In terms of net debt to capitalization it ranks the third most leveraged with a 42.3% ratio.
Following KHNP, CSFB is acting as ratings advisor to Kosepco, JP Morgan as ratings advisor to Komipo and ABN AMRO to Kospo.
