Following hard on the heels of SK Corp, which priced a $250 million five year deal last week, LG Caltex is hoping to raise about $300 million from a 10 year deal. Four banks that have been shortlisted for the euro-144a mandate comprise, Citigroup, Credit Suisse First Boston, Deutsche Bank and Goldman Sachs.
In line with most recent Asian bond mandates, observers expect the group to select two rather than one bookrunner. In this respect, past experience would suggest that CSFB and Goldman Sachs are the two favourities.
Goldman has led all three of the group's previous Yankee bonds of 1995, 1996 and 1997, as well as a $250 million private placement from March 1998. One year on from this deal, however, the baton was picked up by CSFB, which took the group on a roadshow in anticipation of accessing the US market for funds to re-pay short term debt.
However, the BBB-/Baa2 credit baulked at secondary market spread levels that were wider than comparable corporate credits. Instead, it turned to the Asian FRN market, raising $100 million in late 1999 and a further $100 million in spring 2000.
Proceeds from the new deal will again be used to re-finance short-term debt. Indeed, Goldman's last deal of March 98 has just matured, while the 1999 FRN will mature in October.
Because of the small size of most of the group’s outstanding deals, they are said to be highly illiquid. The company's benchmark $100 million 7.5% 2007 bond is currently quoted at 240bp/225bp, compared to a launch spread of 125bp over.
Pricing comparables for the new deal will include Baa2/BBB-rated Petronas, which has a one notch higher rating from Standard & Poor's, BBB-/Baa2-rated Citic Pacific, which carries the same rating, Baa3/BBB-rated Kepco and Baa3-rated SK Corp, which has a one notch lower rating.
Although SK Corp ranks as Korea’s largest oil refiner, it is considered to have a far weaker balance sheet to LG Caltex, which is a 50/50 joint venture between the LG group and Caltex Petroleum.
Typically, the group tends to trade about 40bp wide of its Malaysian counterpart and is currently quoted around this level. The group's 7.875% 2006 bond is, for example, bid at 230bp, while Petronas's 2006 is bid at 185bp.
By contrast, Citic Pacific has benefited from a halo effect that has been driving all Greater China spreads tighter. The group's 7.625% June 2011 bond is currently quoted at 224bp/218bp, some 20bp tighter than SK Corp whose 2006 issue is quoted at 242bp/240bp.
In pricing a new offering, LG Caltex is likely to try and aim to come closer to Kepco, whose 2005 bond trades about 25bp inside LG Caltex. The electricity utility currently has a 2013 bond outstanding trading around the 250bp level and bankers conclude that this will be the level the oil refiner will aim for as well.
Similar to the positive response to SK Corp last week, LG Caltex is also likely to be well received. Aside from the fact that there has been an almost complete dearth of corporate paper from the Republic, investors are likely to welcome any kind of yield pick-up to the sovereign. The Republic of Korea's benchmark 2008 bond is currently quoted at 134bp/128bp.
The mandate is said likely to be decided within the next two weeks.
