The execution of a $1.75 billion two-tranche bond deal by the Export-Import Bank of Korea (Kexim) on Monday gave the Asian bond markets a welcome boost after the deal attracted a record $7.5 billion order book.
The Aa3/AA-/AA- rated deal subsequently traded in a tight range during Asia's trading day on Tuesday, with the $750 million five-and-a-half year tranche closing on a bid/offer spread of 98bp/97bp over Treasuries and the $1 billion 10-year at 101bp/100bp over.
The shorter dated tranche performed less well, widening 2.5bp from its launch spread of 95bp, while the 10-year tightened 10bp from a launch spread. Their contrasting fates reflected the much stronger $5.5 billion order book backing the 10-year tranche and a more generous new issue premium.
In an interview with FinanceAsia, Yoon Heesung, the policy bank's CFO, explains why he believes credit markets will remain conductive for the rest of the year, China is on the right track and Korean consumption will continue to boost GDP even though household debt remains elevated.
What was the strategy behind Monday's two-tranche deal?
We wanted a tranching structure that struck a balance between setting a benchmark and minimising the new issue concession on each tenor. We came to the conclusion that the combination of a five-and-a-half year and a 10-year would achieve the right balance between creating price tension and attracting sufficient investor demand.
The Korean credit market remains undersupplied between five and five-and-a-half years so far this year so we expected broad demand in the mid-part of the curve.
The 10-year has been a popular tenor from Korea in 2015 so we specifically aimed to set a true global benchmark with balanced distribution across Asia, Europe and the US.
We expected the deal to trade well after we attracted an order book of $7.5 billion from 477 accounts.
That’s the largest bookbuild we've achieved in the whole history of our global bond issuance. More specifically, we believe the $5.5 billion order book for the 10-year ranks as the largest and strongest book from a Korean issuer since 2014.
There's strong appetite out there.
What’s your view on market conditions at the moment and the likelihood of a hike in US interest rates?
We think market participants will remain very focused on how US and global economic conditions affect the US interest rate environment. Any sudden change in view can make the markets very volatile, as we've seen this year.
Bearing this in mind, we still think the markets will remain relatively constructive for the rest of the year. But there will be bursts of volatility, which will need to be avoided. So for borrowers with large funding needs like Kexim it all boils down to capturing the best execution window.
We thought it made sense to tap the markets on Monday because supply has been light so far this year. I believe dollar bond issuance from Korea is down about 30% so far this year compared to 2014.
There's been a rally, which we wanted to take advantage of and we were conscious there could be more volatility later this week when the non-farm payroll numbers are released on Friday.
How much have you raised so far this year and why so much in dollars compared to previous years?
So far we've raised about $13 billion including Monday's deal. That meets our 2015 funding target so we don't anticipate raising more funds this year.
However, we might seek some funding through the private placement market depending on how the markets behave.
Yes we have been very focused on the US dollar market with three global bond offerings in one year. The US dollar market has been much stronger than other local currency markets.
What’s your funding outlook for 2016?
We expect to raise a similar amount to 2015. We also expect the currency composition and maturity profile to remain very similar, although the actual ratios will be determined throughout the year, subject to market conditions.
We're consistently keen on diversifying our funding sources and would like to meet our aim of securing funding from 30 different currencies.
As usual we'll be vigilant about finding the best market window.
Any interest raising money from the Panda bond market?
Well we are Korea's most frequent issuer and one of our big themes is to diversify our funding currencies and investor base. The onshore CNY market fits both of those requirements to widen our investor base and provide attractive funding costs, subject to market conditions.
However, the panda bond market is still a relatively new capital market with no real precedents except for multilateral development banks, or large Chinese franchise banks.
Before we tap this market we'd like to see the overall process become more standardized and easier for debut issuers. By that I mean how to make an application, how it gets approved etc.
We'll be closely watching the market and looking forward to a successful debut issue by our government.
How important was the recent rating upgrade from Standard & Poor’s? Do you think Moody’s will follow suit given that it also has Korea on positive outlook?
It was very well deserved as Korea has demonstrated sounder economic growth than other developed economies as well as a sound balance sheet. The Korean economy has become less vulnerable to external shocks, with low levels of external debt and high foreign currency reserves.
Moody’s has had Korea's sovereign rating on positive outlook for over a year. Korea's current credit metrics are comparable to its AA-rated peers and believe an upgrade is possible if Korea continues to maintain a supportive fiscal policy and strong balance sheet.
S&P mentioned the ‘depressed profitability’ of policy banks as one credit constraint. Why is that?
I believe S&P was referring to the profitability of the whole banking sector as most Korean bank earnings come from interest income, which is low margin because of the current interest rate environment and fierce competition. The sector is trying to expand its non-interest business and increase efficiency.
As you can see from S&P’s report, Kexim’s objective is not to maximise profit but serve its policy mandate. Having said that, we've never posted net losses and are focused on securing a sufficient level of profit for business stability and capital adequacy.
What impact is the Chinese slowdown having on Korea?
I think the Chinese economy is on the right track in terms of the structural reform needed to make the growth engine consumption rather than exports. The Chinese slowdown should have a limited impact on Korea because our country’s exports to China are mainly capital and consumer goods, which are less exposed than commodity exporters.
Many Korean companies are also trying to diversify overseas to seek lower labour costs and their economic dependency on China is expected to slowly decrease.
What’s your view on household spending in Korea? Will it come under pressure if rates start rising?
We don’t expect Korea’s benchmark interest rate to rise in the near-term although we may see some upward pressure next year after the Fed rate hike.
There was a strong recovery in household spending during the third quarter compared to depressed consumption in the first half, mainly due to MERs. The government’s key objective for the rest of the year is to maintain this momentum by focusing fiscal outlays on boosting domestic consumption to uphold GDP growth.
