Last month KDB launched KDB launched two very successful deals in dollars and euros. Can you talk about the pricing given that so few Asian issues can match their euro pricing with their dollar levels?
Choi: The original transaction had been postponed in mid-July due to heightened volatility in the US treasury markets and perceived risks on the Korean Peninsula. After the postponement, we watched the market closely waiting for the right moment.
The dollar deal was driven with strong global demand starting from Asia, building momentum as US and European investors participated. The order book was more than 8.5 times oversubscribed, allowing the deal to be upsized to $750 million from the original $500 million target. The significant over-subscription enabled us to price the 10-year issue 6bp inside the original price guidance of 125bp over treasuries. On a treasury basis, the transaction was priced fractionally inside price talk given in late July and significantly inside on a Libor basis which was at the 85bp level in July, saving us 17bp.
The euro transaction was announced and completed within a period of 14 hours. The timing of the offering was highly opportunistic to take advantage of the huge momentum built in the US dollar transaction. The initial price guidance of mid-swaps +65 to 70bp was tightened to +65bp area with the final deal pricing at mid-swaps +62bp. We were able to access the euro currency market without incurring any pricing premium over our outstanding US dollar paper as is typically required of Asian euro borrowers. The deal’s success was secured through a combination of accurate assessment of investor demand and a well timed approach to the market.
Did you plan to do the deals back to back, or was this a reaction to the momentum you felt KDB had generated?
Before launching the US dollar tranche, we thought of having an interval of around one week between the transactions. However, after completing a highly successful $750 million 10 year offering, we took advantage of strong market momentum to execute the Eu500million transaction.
The timing of the transaction was highly opportunistic to take advantage of the huge momentum built in the US dollar transaction.
How did the sovereign's bond affect KDB’s strategy and approach to the markets?
The sovereign’s return early this year, did not alter our strategy or approach to the market. As demonstrated in the recent issue, KDB confirmed its status as the main sovereign benchmark issuer in the major international capital markets.
Furthermore, we believe the government's plan to issue sovereign bonds does not alter KDB's status as the country's key policy arm and does not affect the Bank's relationship with the Korean government in any way.
How much of KDB's $4 billion borrowing target remains to be raised by year end and what is the borrowing target for 2004? What will be the split between $/euros, yen bonds and loans?
We have now raised about $3 billion for the year to date. We have achieved our funding objectives and met market needs through various types of funding tools, including Global and Samurai Bonds, Euro MTNs and syndicated loans. To achieve the investor diversification and low cost funding requirement, there might be a market tapping before year-end. Details including the time and amount have not been fixed.
Our business plan for 2004 is still in planning stages. However, we will continue to watch the market for any new instruments or currency that may correspond with the needs of both KDB and our investors in 2004.
What is KDB's outlook for the Korean economy and the credit profile of Korea? Is the worst over in the consumer finance area?
Despite some signs of a turnaround with brisk exports and improved business confidence, consumer and corporate spending is expected to remain sluggish in light of mounting household debt and political uncertainties. We expect the economy to slowly return to a growth of 0.6% in the fourth quarter due to the injection of W5 trillion to repair the damage from the typhoon. Then, Korea would be able to realize its growth target for this year of 3%.
Despite the preponderance of negative headline news, much of the underlying support for Korea's sovereign ratings is intact. Four consecutive years of fiscal surpluses provides the authorities with considerable policy flexibility to respond to the economic downturn. We also have room for another supplementary budget or other fiscal measures if the growth outlook does not improve, and the country's foreign currency reserve recently reached more than $130 billion. Putting all this into mind, I don't see any problem for Korea to sustain or even upgrade the single A credit.
I think the worst is over for the consumer finance area. The nation's household debt has declined to W439.086 trillion as of the end of June, dropping W252.5 billion from W439.3 trillion at the end of March. It was the first decline in the debt in four years and six months, due largely to credit-card firms cutting back on their household loans. The decline in family debts was attributable to the government's measures to reduce their debts, which drastically scaled back the amount of cash loans by credit-card firms.
What is the current state of the offshore swap market and how will this impact, in your view, issuance in dollars from Korea in the last quarter?
As the swap market of Korea develops, many of the Korean borrowers have started to compare the funding costs between US dollars and won. Recently, won/US dollar swaps have not been very favourable to US dollar borrowers who swap their funding into won. Currently, funding in won is slightly more attractive than borrowing in US dollars. This may have some impact to the issuers who are considering funding in the last quarter of this year.
Which quarter do you forecast the Fed will raise rates in the US?
I understand that most of the major research institutes forecast a rise in the Fed rate in the second half of 2004, and I mostly agree with their views, regarding the recovery of major countries including the US.
