The Korea Development Bank (KDB) made its second ever foray into the euro-denominated market on Monday with an Eu500 million five-year deal led by ABN AMRO and Deutsche Bank. And the A3/A-/A rated bank is so pleased with the result that it is now proposing to raise more money in euros than dollars for the remainder of this year.
Says the bank's international funding head WG Kim, "If circumstances continue to remain this favourable then I could see us raise slightly more in euros than dollars going forwards."
Kim says KDB typically raises 70% to 80% of its annual funding requirement in US dollars, but anticipates the percentage could fall to as low as 30% this year. A further 40% would sourced from the euro market and the remaining 30% from other currencies including yen. In 2005, KDB has a $3 billion to $3.5 billion funding requirement similar to 2004.
The reason it is so pleased with the euro FRN is that it was able to price through its dollar curve and an outstanding five-year euro benchmark by Kexim. Some non-syndicate bankers thought the bank sacrificed a quality order book by pushing final pricing about 1bp to 2bp too far just so that it could say it priced inside of Kexim. However, the deal was still holding its launch spread within its first day of trading yesterday.
Pricing came at 99.905% on a coupon of 30bp over euribor and yield of 32bp over. Fees were 12bp.
At the time of pricing, Kexim's October 2009 euro deal was being quoted at 34bp/32bp over euribor and KDB's 2009 dollar FRN at the same level in Libor terms. The new euro deal, has therefore, priced on top of the offer side of Kexim's outstanding deal despite being three months longer in maturity - which should have been worth at least an extra basis point.
In Libor terms, the new deal equates to about 30bp over, which means that KDB has priced 4bp inside its own dollar curve.
The deal attracted an order book of Eu1.4 billion, although some bankers believe about half of this demand was not of sufficient quality to allocate too. But there was no denying the large number of investors that participated (104), nor the geographic diversity.
About 75% of the deal was allocated to Europe and about 25% to Asia, although non syndicate bankers believe the largest investor was DBS, which is said to be trying to build a commercial banking relationship with KDB.
European demand further broke down: 20% Germany, 15% UK, 15% Spain and 10% Ireland. Both Spain and Ireland are said to have made strong showings because they are home to a large number of Libor-based buyers.
One of the reasons for KDB's success may stem from the profits investors have made from its original euro-denominated deal of September 2003. This five-year deal was priced at 62bp over euribor, almost double the level of the new deal.
And investors may believe there is further upside given the large differential between KDB's new pricing and the levels more established euro-denominated bank credits are able to achieve. Macquarie Bank, for example, has an A2/A rating one notch higher than KDB, but priced a similar five-year deal at 15bp over euribor one week ago.
A week before that, A2/A- rated Banco BPI also priced a five-year deal at the same level. Both KDB and and its two counterparts all command the same 20% risk weighting.
Kim points out that KDB has had a good run since early October when it completed a five-year FRN at 42bp over Libor. When asked whether investors can look forward to a further 12bp of upside over the next three months he says it is unlikely.
"Spread movements depend on the economic performance of Korea and relations between North and South," he concludes. "If those two major factors show signs of improving then the sovereign rating should be upgraded and that will be a trigger for a new bout of spread tightening."
In the meantime he is extremely pleased with the success of the current deal and says its timing was perfect. "We came in a quiet market ahead of the next FOMC meeting and potential volatility if rates increase more quickly than expected," he comments. "We also benefited from the amount of liquidity and money that funds have to put to work at the beginning of the year."
