Kia Motors returned to the international bond markets for the first time in five years on Thursday, building up an extremely large order book by both Korean and Asian standards.
The Baa1/A-/BBB+ rated credit managed to achieve a final order book of $10 billion by the the US book closed on its capped $700 million deal, with bankers reporting a very strong bid across all three regions and particularly the US.
They also added that demand was pretty evenly split between the two tranches, with a slight tilt to the 10-year.
While this level of demand was not quite in the same league as BMW’s recent $14.8 billion order book, it was streets ahead of the $1.2 billion in demand that Hyundai Motor achieved in early March when it came to market with a $500 million green bond issue.
The vastly different response to the two sister companies, which share the same rating, R&D platform and production plants, is partly a function of Kia’s rarity value, its deal structure and, most importantly, market conditions.
In early March, markets were a lot more volatile and the European Central Bank had not announced plans to start buying Eurozone high grade credit as part of its quantitative easing programme.
The ECB’s announcement on March 10 prompted huge order books for subsequent euro-denominated deals and sparked a rally, which has compressed spreads across the board.
Where Kia Motor’s own credit is concerned, the two big selling points were rarity value and a globally well-known brand name.
Where the former is concerned, the group only has one outstanding international bond issue and this matures in June. By contrast, Hyundai Motor has roughly $7 billion outstanding.
Kia Motors has also issued debt in its own name, whereas Hyundai Motor has recently utilised Hyundai Capital and a partial guarantee structure.
The second big selling point for Kia’s deal was its dual tranche structure and in particular the inclusion of a 10-year tranche.
There is currently almost no outstanding 10-year paper from the Korean corporate sector, with the exception of a highly illiquid 6.625% 2027 deal from A3/A- rated SK Telecom, which was trading on a mid-yield of 3.04% on Wednesday.
A lack of longer-dated paper combined with high demand for it from Korean insurance funds has created an inverted yield curve for many of the country’s quasi-sovereign borrowers that do have maturities across the spectrum.
As a result, the spread pick-up between Kia’s new five- and 10-year tranches is very slim and bankers said they would not be surprised if the 10-year tranche trades through the five-year in secondary market trading as KNOC has done over the past two weeks.
"This was one of the main issues we had to deal with in the US where they are used to seeing a much steeper curve of of up to 20bp between five and 10-years," said one banker. "But they got comfortable with the 7.5bp we priced at."
Such heavy demand also meant that pricing was very aggressive.
A $400 million five-year tranche was initially marketed at 170bp over Treasuries, before indicative pricing was narrowed to between 145bp and 150bp over. Final pricing was fixed at 99.661% on a coupon of 2.625% to yield 145bp over Treasuries.
Distribution statistics show that 50% went to the US, followed by 30% to Asia and 20% to Europe. By investor type funds took 71%, banks 12%, insurance funds 9%, central banks 7% and private banks 1%.
The $300 million 10-year tranche was initially marketed at 185bp over before being tightened to 2.5bp either side of 155bp over. Pricing was then fixed at 99.408% on a coupon of 3.25% to yield 152.5bp over Treasuries.
The US took 45% of this tranche with 38% placed in Asia and the remaining 17% to Europe. By investor type, fund managers were allocated 69%, insurers 14%, banks 13%, pension funds and central banks 3% and 1% to private banks.
Fair value
The five-year tranche priced about 3bp through Hyundai Motor’s two March 2021 deals.
The group has a $400 million 3% March 2021 bond outstanding, which was quoted on a G-spread of 148bp during Asian trading hours on Thursday. Its most recent $500 million 2.875% green bond was also trading at the same level.
Bankers calculated fair value for both tranches at anywhere up to 10bp over Hyundai. "Some investors thought 5bp, others 10p and some even 15bp," said one syndicate banker.
In a sale note ahead of launch, Mizuho calculated fair value for the entire deal at 150bp to 155bp over Treasuries.
Outside of Korea, global comparables include Japan’s Nissan Motor and Germany’s BMW. Nissan Motor has an A-/A3/BBB+ rating, which is one notch higher from Moody’s and the same level from S&P and Fitch.
Its 2.55% March 2021 bond was trading on a G-spread of 100bp on Monday.
BMW has an A2/A+ rating, two notches higher from Moody’s and one notch higher from S&P. Its $1.5 billion five-year deal was trading on a G-spread of 87bp on Monday..
Kia and Hyundai dominate Korea’s domestic auto market with a combined market share of roughly 70% and globally rank fifth. In a credit report on the sector, published this week, S&P noted that global car companies are reaping the rewards of the cost cutting and restructuring they have implemented since the global financial crisis.
In Kia’s case, the agency said its rating is supported by the group’s conservative financial profile, with debt to Ebitda likely to remain at zero to 0.3 times over the next two years.
Kia’s latest deal follows two well-received offerings from Korea Resources and Korea National Oil Corp (KNOC), both of which have traded well in the secondary market.
The former closed Thursday in Asia on a bid/offer spread of 103.5bp/102.5bp over Treasuries compared to a new issue spread of 110bp last week. KNOC, meanwhile, closed Thursday at 95bp/92bp for its recent 2021 bond, which priced at 95bp and 92bp/88bp for its 2026 bond, which also priced at 95bp.
The country has also been something of a saviour for the international Asian debt capital markets, which have been starved of paper since Chinese borrowers returned home. They are also likely to remain active given the estimated $55.4 billion in paper set to redeem this year.
According to Dealogic figures, Korean entities have raised $9.1 billion in the G3 markets so far this year, almost 44% of the $21.07 billion raised for the whole of 2015 and nearly one-third of 2014’s record breaking $31.3 billion.
Joint global co-ordinators are: Bank of America Merrill Lynch, Citi, HSBC, JP Morgan and Nomura.
This article has been updated to include final distribution statistics.
