A $650 million five-year fixed rate issue for the Korean Electric Power Corporation (Kepco) was priced in London yesterday (Thursday) at a slim premium to the Korea Development Bank (KDB), the Republic's benchmark sovereign proxy. The new deal also marks a key benchmark for Kepco, which has not accessed the dollar market since March 2000, but has now successfully completed its first public transaction without a KDB guarantee. To price flat to its existing curve (it has a 2027 put 2007 outstanding) was therefore remarkable and particularly in the context of volatile debt and equity markets.
Backed by four lead managers - Deutsche Bank, Goldman Sachs, Salomon Smith Barney and UBS Warburg - the deal was priced at 99.546% on a coupon of 4.25% to yield 4.352% or 140bp over Treasuries. Equating to 86bp over Libor, bankers say this represents a 14bp premium to the KDB's November 2006 bond, which was trading at 72bp over Libor at the time of pricing. Adjusting for the additional year of maturity, this puts the new Kepco bond about 9bp to 11bp over on a like-for-like basis, through the fair value assumptions of most credit analysts.
Books closed just under three times subscribed with orders totaling $1.85 billion, of which $800 million was generated by Asia, $700 million by the US and $300 million by Europe. Korea itself accounted for about 10% of the book, which held a total of 180 investors. Predictably the Asian bid was strong, came in early and at the very tightest end of the range. More surprising was the strength of US demand, which held firm even though the deal was priced to the Asian bid.
Observers attribute the reception to the combination of Kepco's inherent credit strengths and a flight-to-quality prompted by volatile markets, which will always benefit a defensive utility credit. As one observer concludes, "Kepco is just the kind of credit investors are looking for right now. There hasn't been that much issuance in the US and investors are long cash. They're looking for a well-known name with a good macro story behind it."
From Asia there have been few sizeable investment grade corporate offerings so far this year and most of those that have come at the shorter end of the curve have been from Indonesia, which sits at the very bottom of the credit spectrum. With an A-/Baa2 rating, Kepco is rated two notches below the sovereign by Moody's, but at the sovereign ceiling by Standard & Poor's.
For all investors, the key investment consideration was the likely speed and success of the government's privatization programme and the impact this will have on Kepco's credit profile and ratios. Myung-Whan Kim, the company's general manager for international finance says proceeds from the divestment programme will be used to pay down debt and fund capex.
"At the moment there's no plan to pay a special dividend to government," he says in response to the belief most analysts hold to the contrary.
"In 1997," he adds, "We had a AA- rating. At the end of our restructuring process, we hope that the rating will go back up to this level again."
Kepco's debt ratios are currently comfortably single-A, with the company reporting a gross debt to capitalization ratio of 46% at the end of 2001 and an EBITDA to net interest coverage ratio of 4.76 times. As of June 2002, Kepco had total debt of $19.6 billion of which $6.87 billion is foreign currency denominated.
Over time, most analysts expect Kepco and KDB's credit spreads to move together and in tandem. Many argue that its evolution into a transmission company will enhance its underlying credit strength, while its retention of the nuclear generation business will push it even closer to the government, since the sector is of such strategic national importance.
The government presently owns 53.98% and is in the process of divesting five gencos and Powercomm, Korea's second largest high-speed data cable network. There has, however, been some uncertainty surrounding the programme since a single sale has yet to be made. The sale of a strategic stake in Powercomm, for example, was cancelled in February because the government thought it could get a higher price later.
The divestment of the gencos has also met union opposition and some analysts argue that foreign investors will be wary of making a commitment to a country where the dominant domestic operator Kepco will still retain 40% control of the generation business post privatization.
During roadshows, some investors were also said to have highlighted concerns about the consent solicitation Kepco is seeking to deal with the cross guarantees and covenant restrictions on its foreign currency debt, which are preventing the sale of the gencos. Kepco officials replied that the process should be completed by the end of the year.
Proceeds from the present deal will be used to re-finance yen-denominated loans from Jexim and JBIC. Following the completion of the dollar deal, a cross currency swap is being put in place, which will mirror the re-payment schedule of the JBIC loan, which matures in September 2007 and has a semi-annual re-payment schedule, starting in March next year. Kim estimates the bank will save 130bp bi-annually as a result of the swap.
