KDB ponders yen bond as Hana Bank woos investors

Bong Sik Choi, general manager of the international banking department at Korea Development Bank (KDB), has told FinanceAsia that the government-owned policy bank plans to raise at least another $1.4 billion in 2009.

KDB has already raised $2.6 billion this year, including a successful $2 billion five-year global bond in January, and has a total refinancing requirement of $4 billion. However, it may raise more if it has the opportunity, and it is keen to lock in for mid- and long-term tenors.

Choi said that KDB is now looking at other major currencies, such as euros and -- especially -- yen, and completed a roadshow to Japan in early March. "But, we will also be opportunistic, taking any advantages offered by the syndicated loan market, drawing down on our medium-term note programme, and even issuing in other Asian and emerging market currencies. The bank can move quite rapidly", he added.

In response to concerns that KDB, and other state-owned financial institutions might be crowding out Korea's cash-strapped private banks, Choi argued that, "there is a separate, though sometimes overlapping market for bonds issued by Korean private banks, so we don't feel we are crowding them out by issuing bonds ourselves. Besides, historically Korean names have made up between 40% and 45% ($12 billion-$15 billion) of issuance out of non-Japan Asia".  

Korea's fourth biggest lender, Hana Bank, is currently on the road preparing investors for a three-year dollar bond deal, which is likely to be between $500 million and $1 billion in size. It will be the first bank to make use of a government guarantee, which was made available back in October last year.

That support will cost Hana 70bp a year, and perhaps the loss of full autonomy. Any domestic bank that wants to attach the guarantee has to enter into a memorandum of understanding with the government that at least some of the proceeds will go towards providing liquidity and credit for small- and medium-sized companies -- particularly exporters -- and also to low-income households. Failure to do so might lead the regulator, the Financial Supervisory Service, to increase the cost of the guarantee, restrict its coverage or impose penalties.

Choi pointed out that KDB doesn't need an explicit government guarantee because, as a state policy bank, it already has an implicit guarantee. Article 44 of the KDB Act, which provides an implicit guarantee by stating that the government will offset any losses of KDB, will remain intact for as long as the government retains its controlling shareholder position, even after an amendment of the KDB Act, he explained.

However, payments of principal and interest on the five-year bonds are not actually guaranteed by the Republic of Korea, so investors need to be persuaded that KDB's "quasi-sovereign" status offers sufficient protection. Nor is it a secret that the government has plans to hive off part of KDB as a private investment bank, which raises questions about the sustainability of the implicit sovereign support.

Hence, the prospectus for the earlier $2 billion issue, and no doubt for future deals denominated in foreign currencies, contains a "change of support" clause. KDB promises to repurchase the bonds at par value (plus accrued interest) if the Republic relinquishes 100% ownership, or the 1953 Korea Development Bank Act (which set up KDB as a government-owned body) is amended, resulting in a credit rating downgrade by at least one of the major ratings agencies to below the sovereign rating. KDB is currently rated Aa3 by Moody's Investors Service, which is higher than the A2 sovereign rating assigned to Korea, while Standard & Poor's has assigned the same rating as the Republic.

However, the change of support clause wouldn't be triggered if the Republic decides to fully guarantee the bonds. And if that were to happen, then KDB's bonds would effectively have the same status as Hana's future issue, or the bonds of any other private bank that eventually subscribes to the government-guarantee scheme. Except, of course, KDB wouldn't have to pay an annual fee, and rather than lose autonomy, the explicit support would be given as a result of the bank gaining independence.

But for now at least, KDB is mandated to help alleviate the troubles endured by Korea Inc. On December 19, 2008, the government contributed W500 billion ($361 million) in the form of common shares in Korea Expressway Corporation to KDB's capital, and a further W650 billion in cash on January 2. These injections were aimed at bolstering KDB's capital to allow it to help stabilise the domestic financial market by supporting small- and medium-sized enterprises and by providing greater liquidity to corporations. As of January 14, 2009, KDB's paid-in capital was W9.39 trillion compared to W8,24 trillion on June 30, 2008.