KDBÆs $400 million loan closed successfully

The mandated lead arrangers for the Korea Development Bank's (KDB) $400 million three-tranche term loan have successfully closed the deal, with some tranches proving more popular than others. ABN AMRO, Barclays Capital, Deutsche Bank and Tokyo-Mitsubishi International managed to scale down their committed amounts by bringing in 10 other banks on the transaction.

The deal marks the lowest pricing for KDB since the Asian financial crisis. Bankers close to the deal argue that it has received a better-than-expected reception from the market. As much as $150 million was raised in the syndication stage, which bankers say is good given that typically banks have not able to drum up more than $100 million from the market. The syndication process was also shorter than usual as KDB is expected to drawdown the amount on September 25. The loan will be signed tomorrow (Thursday).

The results of the deal demonstrate the fact that arrangers were able to scale down their original commitments by about 50%. This was underpinned by the fact that banks participating in the transaction would not have to worry in terms of credit quality of the borrower. KDB is a prime banking asset from Korea given that it is single-A rated and government-owned. Despite the tight pricing, banks, by participating in the deal, include an asset in their portfolio that represents only 20% risk weighting according to BIS guidelines.

However, rival bankers argue that given KDB's credit quality the deal has seen modest reception from the market. This is visibly demonstrated in the final allocations for Tranche 1, which is a one-year $200 million transaction. As was expected, Tranche 1 met with disastrous reception with only three other banks participating in it. Together the three banks committed $36 million, which represents only 18% of the tranche. Typically a deal is considered successful if the arrangers are able to scale down their commitments by about 50%.

That was clearly not the case in Tranche 1, where Deutsche Bank, one of the four leads, accounted for $82.1 million, or roughly 41% of the tranche size. Some observers are quick to point out that the banks participating in the transaction are clearly doing so for relationship reasons with an eye on ancillary business to be derived from the borrower.

It is common knowledge that following the loan transaction KDB would also be looking to raise over $500 million from a global bond issue. A classic example in this regard is the $200 million one-year deal for Woori Bank that was priced at a ludicrously low 10bp over Libor (all-in of 19bp). Two of the three lead arrangers - ABN AMRO and Barclays - subsequently won the mandate for a $300 million Eurobond deal from Woori Bank.

Nonetheless, as KDB's pricing on the deal is a benchmark for other Korean borrowers, the results of the transaction, especially tranche 1, serve as an indicator of the market sentiment for deals from Korean banks. Liquidity is clearly not existent for tightly priced one-year bank deals from Korea. This was clearly demonstrated in the Woori Bank loan transaction, which saw participation from only three other banks, and the latest KDB transaction.

The mandated arrangers for the $150 million, one-year Koram Bank loan might shudder to think what lies in store for their deal. The transaction, which was slated for close earlier this week on September 16, has only garnered commitments from the market of up to $30 million, and that too despite the presence of six banks in the mandated arranger group.

On the other hand, the $150 million two-year loan for Korea Exchange Bank is proceeding quite well and is slated for closure later in the week. The facility has already raked in commitments of up to $130 million and is likely to be upsized to $200 million. Observers believe the good reception for the KEB deal is a reflection of the fair pricing. The same can be said about KDB's two-year (Tranche 2) and three-year (Tranche 3) tranches on the present transaction, which have seen better reception from the market than the one-year tranche.