The Republic of Korea (ROK) returned to the international debt markets for the first time in just over a year yesterday (September 16) with a $1 billion global bond offering.
Under the lead management of Barclays, Citigroup, Deutsche and JPMorgan, the 10-year SEC registered deal was priced at 99.290% on a coupon of 4.875% to yield 4.966%. This equates to 85bp over Treasuries or 40bp over Libor. Fees are 12.5bp.
Specialists believe the new deal has priced right on top of the outstanding curve on a like-for-like basis. The Republic's existing 4.25% June 2013 bond was being quoted yesterday at 71bp over Treasuries, equating to about 38bp over Libor.
Last year, by contrast, the Republic adopted an extremely aggressive approach to its first international benchmark since the financial crisis in 1998. After ignoring advice to cede a few basis points back to the market, it priced the deal at 56bp over Libor, some 9bp tighter than its outstanding April 2008 deal, which has a five-year shorter duration.
Unsurprisingly the 2013 bond immediately popped during secondary market trading and was being quoted about 10bp wider within the space of a few weeks.
This year, the Republic appears to have learnt its lesson and decided to take a more long-term approach with investors. "Everyone knows that the government doesn't need the cash, but is likely to come once a year to built up a coherent and credible yield curve for other borrowers in the country," says one observer. "It's being much more sensible about how it develops an investor base."
The government was rewarded with an order book just topping the $3 billion mark, with participation by 157 investors. By geography, Asia accounted for 45%, Europe 33% and the US 22%. Korea accounted for about 12.5% of the total.
By investor type, fund managers took 48%, banks 28%, insurance companies 19% and retail 5%.
Specialists say that roadshows led by MOFE director general, Joong Kyung Choi, were well received and the most optimistic believe the A3/A-/A rated Republic may get upgraded within the next six months. As usual, the swing factor is likely to be North Korea. Moody's moved the Republic's outlook back to stable in May as a result of diminishing tension between the two countries.
However, the issue re-surfaced again mid way through roadshows when the New York Times published a front page story on September 10 quoting US intelligence officials who believe a nuclear test is imminent. Signs of a mushroom cloud over North Korea a few days later unsurprisingly led many to fear the worst and the subject came up during every single investor briefing.
The team is said to have defused the situation by pointing out that the explosion occurred overground and near the construction site of a hydro-electric project, which North Korean officials have now invited international diplomats to come and inspect. And as one observer comments, "The team also highlighted that China is North Korea's only ally and is not about to let a nuclear bomb be tested right on its doorstop, blowing radiation across the Mainland."
In the past, the North Korea fear factor has had a malign influence on sovereign spreads. During the last major incident, sovereign spreads spiked from 120bp to 180bp over a two month period between January and March 2003. This week, they have barely moved, although the North Korean issue meant the Republic failed to benefit from the overriding upward momentum in Asian credit spreads.
In its recent ratings release, Moody's said that the dynamism of Korea's export sector is balancing a sluggish domestic economy, which continues to be weighed down by high levels of household debt.
Korea currently has $128.2 billion in foreign currency debt and $163.6 billion in reserves. This equates to a foreign debt to GDP ratio of 25.1% and places the country fifth behind Taiwan, China, Singapore and India.
