The Korea Development Bank (KDB) remains Korea's biggest borrower and had a great start to the year with a Eu500 million issue in early February. This deal priced at 30bp over Euribor, some 4bp inside the bank's dollar Libor curve and inside a similar deal by Kexim.
Another measure of success was that KDB's prior five year deal in euros had priced at 62bp over - indicating that it had halved the spread it had to pay to euro investors since that deal was launched in September 2003. KDB was so pleased with the outcome of this deal that it even told FinanceAsia this February that it could envisage borrowing more in euros this year than dollars. "If circumstances continue to remain this favourable then I could see us raise slightly more in euros than dollars going forwards," said WG Kim, head of KDB's global funding team. He said he could envisage borrowing 40% of the $3.5 billion KDB needs in euro versus 30% in dollars.
But now - with market conditions somewhat altered - Kim has slightly revised that view. "In early February the reception of investors was very strong and the pricing we accomplished at that time was very similar to US dollars," he comments. "That was the reason I made that remark. Nowadays the situation has changed a little bit and the euromarket does not look as competitive as in January or February."
In fact, he adds: "The overall market nowadays doesn't look as good as we expected. Late last year, we thought the market would perform comparatively well, but the market is now not so good - due to the inflationary pressure in the US. The Asian credits including Korea are affected very much by this. In the case of the 10 years maturity our spreads have moved out 10-20bp."
This has affected his strategy, he notes: "In the case of previous years our funding strategy was focused on the benchmark role. Nowadays we would like to put increasing focus on competitive funding, meaning low cost borrowing such as from private placements or markets that offer better price competitiveness than major markets. By this I mean Hong Kong dollar, Singapore dollar, Swiss franc and British pound sterling. These offer pricing competitiveness on and off."
KDB has already raised around $1 billion, but that leaves it with $2.5 billion to fund. Last year KDB chose to fund mostly in the first half, but this year he says that he had initially planned to fund evenly over four quarters.
However, he has now revised that plan. "The market is changing very rapidly and we're considering going for earlier funding. The Fed Fund rate might go up to more than 4% if the current overall picture continues."
KDB maintains very aggressive borrowing targets. For one year borrowing it seeks pricing of 10bp over Libor and for five year funding between 25-30bp over Libor. He says the $1 billion that has so far been funded has been in line with these targets.
Asked about 10 year issuance, his reply is surprising. "Frankly we are trying to avoid the longer maturity at present because the Republic of Korea is planning to issue 10 year bonds in the international market and we're trying to avoid confusion in the sector."
Will exiting 10 years not impact KDB's credit curve, and prove detrimental? "I don't think KDB will suffer from the absence in the 10 year sector because we can defer to the curve of the Republic of Korea and if the Republic doesn't issue 10 years bonds in the future, then KDB would step in."
KDB's change of strategy - moving away from funding primarily through benchmark deals and exiting the 10 year part of the curve - can only be explained by competition from both Kexim and the sovereign itself. Does Kim feel KDB has suffered from the loss of its status as Korea's undisputed benchmark borrower?
"I don't think it can be described as damaging. We welcome the competition. If all three are competing for investor support in a market with limited scope then that could be damaging but in the case of the current financial environment there is a wide array of investors and there is a substantial pool of liquidity."
At the moment, KDB borrows 60% of its total requirement in the domestic market and the rest abroad.
A key question is obviously KDB's quasi-sovereign status and whether that will be diluted over time as KDB become more and more commercialized. Considering its world leadership in many industries, does Korea actually need a development bank? And is it likely that KDB will evolve in the same way Development Bank of Singapore (DBS) did into a fully-fledged commercial bank?
"The government has no intention of that kind. For the time being - meaning up to the completion of the development of North Korea - I do not think KDB could be fully commercialized. If North Korea opens and the dialogue goes smoothly KDB will have a wider development role. Our borrowing requirement would then obviously be much higher."
South Korea may have outgrown the need for a development bank, but few people would disagree with Kim that North Korea needs one. And while no one can make any predictions about when such a circumstance would arise, it will ensure KDB's quasi-sovereign status in the year's ahead remains unchallenged.
