Korea's sometime proxy sovereign borrower is believed to have mandated Barclays Capital, Credit Suisse First Boston and JPMorgan for a $1.05 billion global bond yesterday (Thursday). The three won the deal after banks were asked to submit hard underwritten pitches last Wednesday for a $300 million short-dated tranche, $500 million five-year tranche and $250 million 10-year tranche.
Last night, however, it was unclear whether they would be held to their various promises since launch of the deal has been pushed back a week. Initially, observers say KDB intended to embark on a two-day roadshow beginning this Monday, with pricing scheduled for either Wednesday or Thursday. Now, it is said to be looking to conduct the same schedule the week beginning November 4.
The A-/A3/A policy bank has come in for mounting criticism recently, not least from its own government, which is threatening to launch a pure sovereign bond next year to re-finance debt undertaken at the height of the financial crisis, which falls due in April. Until last month, the government continually reiterated that its $4 billion transaction of spring 1998 was a one-off response to the Asian financial crisis, which would not be repeated for fear of disrupting KDB's pricing and yield curve.
And a growing number of bankers argue that a sovereign bond would be unnecessary if KDB acted in a more professional manner befitting its status as a sovereign proxy for a single-A rated country. Instead of continually trying to squeeze the last basis point out of the market, most believe it should focus its energies on strategic, market-driven transactions that set liquid benchmarks for other potential issuers from the Republic.
As such, critics question why it is only raising $250 million at the ten-year part of the curve when there is a clear need for a liquid benchmark. "There are a whole number of Korean banks examining the feasibility of hybrid securities and they need a proper ten-year benchmark to price off," says one banker.
Like many Korean banks, KDB has found it more efficient to fund at the short-end of the curve and has consequently developed a debt profile reminiscent of pre-crisis days. As of June this year, the bank had Won54.7 trillion ($44 billion) outstanding in non-loan borrowings, 71.9% of which falls due within three-years and only 10% after five-years.
It was, therefore, not surprising to see it trying to get banks to pitch for a $300 million short-dated tranche and to do so on a bilateral basis where pricing is nearly always cheaper. The bank's recent $400 million syndicated loan, for example, set a new post crisis pricing record and comprised three tranches with respective yields of 15bp for the one-year, 23bp for the two-year and 33bp for the three-year.
How the new short-dated deal will be structured remains unclear and observers say the borrower is undecided on both maturity and structure. Where the five and 10-year tranches are concerned, fees are said likely to come in around the 20bp and 25bp mark, slightly higher than recent market precedent.
But the overall mandate process has proved controversial and bankers argue that it is not only damaging to KDB's reputation, but completely nonsensical to get hard underwritten bids unless a deal can be launched straight away. "It wasn't even as if officials asked for hard underwritten bids relative to KDB's curve," says one. "They wanted absolute bids."
As the situation now stands, banks that lost on the basis of competitive bidding will be incensed if the leads are allowed to re-price relative to the market and those that won the deal will find the addition of a week's market risk untenable.
On the positive side, part of the curve has moved in the leads' favour since proposals were submitted last Wednesday. On that day, KDB's March 2004 bond was bid at 106.22% to yield 2.87% or 90bp over Treasuries, while its November 2006 bond was bid at 104.41% to yield 4.06% or 110bp over Treasuries.
In Asia trading yesterday, the same bonds were respectively bid at 105.93% to yield 3% or 83bp over Treasuries (7bp tighter) and 103.37% to yield 4.33% or 113bp over Treasuries (3bp wider). In tandem with international market, both deals are well off their three-month lows of 56bp and 88bp over Treasuries.
However, experts believe the new deal will be well received in a market with no other competing deals and a preference for defensive credits. As Barclays concluded in a recent research report, "KDB bonds are a Korean benchmark and as part of high grade Asia, are a defensive investment which demonstrate a track record of resilience in times of spread volatility."
