Joint global co-ordinators Barclays, Citigroup and Goldman Sachs will open presentations for the Republic's new benchmark 10-year global today with investor conference calls in Asia, followed by a roadshow in London on Tuesday and New York on Wednesday. Pricing is expected to take place either Wednesday evening New York time, or Thursday subject to how fast the book builds.
Alongside the three leads, there is a long roll call of co-managers, although none will receive any bonds or fees. The lack of fees is unusual, but not unprecedented and hardly surprising given the miserly figure the Republic has been able to negotiate for itself.
At 15.5bp, the sovereign is paying the lowest figure of any Korean credit and in terms of Asian sovereigns, will rank second only to the Republic of the Philippines, which managed to get away with 13bp for a re-opening last June. Back in 1998, by contrast, the then double-B rated Republic paid 75bp for managers and underwriters and a 40bp selling concession on its $3 billion 10-year bond.
The 11 co-managers, which have agreed to participate in the new deal, have done so purely for relationship reasons and are: Credit Suisse First Boston, Daiwa SMBC, Deutsche Bank, Lehman Brothers, JPMorgan, Morgan Stanley, UBS Warburg, Samsung Securities, Daewoo Securities, Hyundai Securities, and LG Investment & Securities.
Like most recent Asian bond deals, the Republic's transaction is likely to be a momentum driven play with less emphasis on credit fundamentals. This is underscored by the use of an accelerated marketing schedule, which should result in a huge order book.
But while Asia is likely to provide early momentum, recent experience suggests it will be the US, which underpins the overall book. This is because the bond is expected to price tightly on an asset swap basis, making it less attractive to Asian banks.
US accounts, on the other hand, will look at it on a relative value basis to domestic single-A rated corporates and should also find the deal appealing because there are so few sovereigns with single-A ratings. Most high grade sovereigns tend to either have triple or double-A ratings, while emerging markets sovereigns are typically rated triple-B or lower.
The best comparables are the Emerging Europe convergence plays and these all price tighter. The BBB+/A2 rated Republic of Poland, for example, completed a new 10-year deal just over a week ago at an equivalent Libor spread of roughly 50bp. A-/A2 rated Korea is expected to come about 30bp wide of this level.
For index trackers Korea's deal will be a must buy and for global accounts, it will have huge rarity value and almost certainly stay that way. The Republic has only ever tapped the market once before, back in 1998 when it needed to emphasise that the country still had access to international funding after the financial crisis and IMF bail-out. This time it has said it views a deal as a one-off to provide a benchmark for domestic corporates and banks.
Where pricing is concerned, the key question will be how aggressive the sovereign can price relative to the recent benchmark set by the Korea Development Bank (KDB). And while a huge order book will favour aggressive pricing, it will be investors' perception of any upside momentum in the country's credit profile, which will likely swing the last few basis points one way or the other.
Korean credits have been remarkably stable over the past two weeks and managed to claw back a lot of the year's underperformance. However, as a group they have still underperformed every other Asian country. Following Moody's change in sovereign outlook from stable to negative on February 10, Korean spreads began to widen dramatically. One month later, tensions over North Korea's nuclear weapons programme had pushed the Republic's 8.875% April 2008 bond out to 190bp over Treasuries.
At Friday's close in Asia, it was back trading to 100bp bid, its lowest level for three months. But, similarly rated credits in the Greater China universe are trading much tighter. The CLP May 2012 bond, for example, currently trades at 65bp over and the China 2011 at just 30bp over.
The most optimistic believe that a combination of overwhelming demand and a tightening bias in secondary spreads could see the Republic's new deal pierce 100bp on a spread to Treasuries basis. This would mean it coming roughly 20bp through the KDB on a non duration adjusted basis.
KDB, for example, has a November 2012 bond trading at 120bp bid on Friday. It also has a November 2007 bond trading at 104bp bid, suggesting 16bp on the Korean credit curve between five and 10-years.
Most, however, believe that with the Republic's existing five-year trading at 100bp bid, the new deal is most likely to price around the 110bp level. The KDB's previous three global bonds have priced at a 15bp to 22bp premium to the sovereign.
Where the credit is concerned, all agree that the swing factor is North Korea. For investors the key factor is whether current tensions will soon fizzle out, or a North Korea premium is here to stay. HSBC's head of Asian credit research, John Woods, published a research report last week which stated that, "the inexorable deterioration in North Korea's political and economic condition - and its attendant impact on reunification risk - represents by far South Korea's most significant credit overlay."
And he says that while Korean bonds will benefit over the near-term from any reduction in tension, the sovereign's risk profile will be slowly re-priced over the longer term. "The sovereign's credit profile is deteriorating by increments as North Korea chips away at political stability," he concludes.
HSBC itself has two mandates in Korea, both of which are likely to be exercised over the coming two weeks. In association with Barclays it has the mandate for a $200 million tap of Kookmin's 4.625% December 2007 bond. This deal is expected to be the one to immediately follow the sovereign.
Then Citigroup and HSBC plan to launch a $300 million to $500 million five-year deal for the Industrial Bank of Korea. This deal will have short roadshows.
