The re-merger between KDB and KoFC could increase the former institution’s annual average funding of $6 billion to $7 billion by 20%, according to a senior KDB funding official.
As part of South Korea’s broader scheme to reshape the country’s policy financing, the revision bill on the KDB Act was been submitted to the National Assembly for parliamentary approval last year so that the consolidated institution could be launched in July 2014.
“If the bill passes then the merger will proceed as planned and our funding size will increase,” said the Seoul-based KDB funding official to FinanceAsia. “The annual funding size of KoFC is around $1.5-$2 billion annually and, if merged, we have to assist with its funding plans as well.”
The South Korean government in August 2013 proposed a plan to halt KDB’s privatisation as current president Park Geun-hye’s administration pledges to support financially vulnerable firms, especially smaller companies. The consolidated KDB will take back loans and investment divisions from the KoFC, which is its spin-off policy lender created in 2009 to cater to small-and-medium-sized enterprises (SMEs).
The sale of KDB was an ambitious policy project pushed by the previous government as part of its broad plans to privatise public institutions. But the attempt to privatise fell through as the economy took a downturn and many lawmakers have opposed such a plan.
Nonetheless, with or without the KoFC merger, KDB aims to raise approximately $7 billion to $8 billion this year for refinancing purposes as well as to provide funding to major Korean conglomerates – known as chaebol, says KDB’s funding official.
More than 50% of the Korean policy bank’s financing will be front-loaded in the first half of the year as it seeks to make use of the still favourable rates environment, before the Federal Reserve (Fed) accelerates its tapering plans towards the end of the year.
However, the funding official adds that this is not a major concern based on the fact that many investors consider South Korea as a safe haven destination as opposed to an emerging market.
“Since Korea’s rating upgrade in 2012, we have been witnessing a much more diversified investor base with the investment grade funds and strong US participation coming in, including pension funds and central banks,” said the funding official. “We will try to expand our relationship with these investors so that we can further broaden our investor spectrum and reduce funding costs accordingly.”
South Korea saw its debt ratings boosted by the three global rating agencies within a three-week space in 2012 on the back of fiscal soundness and economic resilience. Standard & Poor’s upgraded the sovereign one notch to A+, the fifth-highest by the rating agency, while Fitch Ratings and Moody’s has the sovereign at AA- and Aa3 respectively, both the companies’ fourth-highest level.
As a result, this has reduced funding costs for Korean issuers by an average of 15bp-20bp, estimates the KDB funding official. The continued improvement in the country’s economic condition means that such spreads could narrow further.
Prefunding
KDB has been prefunding since September 2013. This has allowed the institution to smooth out its maturity profile – meaning the policy bank won’t have notes expiring one after another within a narrow timeframe – thus reducing its refinancing burden. It also hopes to extend its average bond tenor from three years to five on the back of increasing project financing needs, notably from the infrastructure sector.
In 2013 alone, the KDB raised a total of $4.5 billion in various currencies excluding the Korean won, including the Aussie dollar, Singapore dollar and Swiss franc, according to Dealogic data. US dollars accounted for more than half of the total issuance, followed by the euro with 20%.
“The main source of our funding is G3 currencies,” said KDB’s funding official. “But we will continue monitoring other local currency markets, including Kangaroo, dim sum and Swiss franc-denominated bonds in order to diversify our funding and investor base.”
On January 14, KDB sold a $1.5 billion dual-tranche bond, replicating the structure of Korea Export-Import Bank’s (Kexim) note issued the week before. The deal received an order book of more than $9 billion from more than 400 accounts, highlighting the continued appeal for Korean paper, not only from Asian investors but globally.
KDB – deemed one of Korea’s most regular debt issuers – was founded in 1954 as a government-owned financial institution in accordance with the KDB Act to finance and manage major industrial projects.
