The $160 million ten non-call five upper tier 2 deal, for which details were announced yesterday (Monday), has proved to be one of the most unusual debt transactions to emerge from Korea in recent years. With Salomon Smith Barney as lead manager, pricing was actually finalised on November 22, but a deal was not formally signed until last Friday because of the sudden inclusion and equally sudden withdrawal of Barclays Capital as a joint-bookrunner.
The pricing date is important because in the week after the negotiated deal was agreed with KorAm and a majority of investors, Treasury yields and their Korean equivalent backed up by 100bp. By November 22, the lead manager is said to have had a firm order book of $125 million to $130 million, but plans to sign off the deal were scuttled after Barclays is said to have approached the Korean bank with an offer to underwrite a further $100 million. After this proved difficult to execute, the British investment bank withdrew and the book for the Ba3-rated deal was closed at $160 million after firming up a few late orders.
Final pricing came at par on a coupon of 6.95% and spread of 284bp over five-year Treasuries. At the time the deal was finalised, this represented a 230bp pick-up over Hanvit Bank, which has a one notch higher rating of Ba2 and a 12.75% upper tier 2 deal due March 2010 trading at about 515bp over Treasuries. It has since tightened down to a bid/offer level of 494bp/457bp and remains well bid on a price of 109.75%/111.25%.
Observers report the participation of about half a dozen investors, all of which came from Asia and the vast majority from Korea. Salomon designed the kimchi structure as a means of raising dollar-denominated debt for placement with domestic rather than international accounts. The deal has full Eurobond documentation and will be listed in Singapore, although given the tight placment, secondary market liquidity is likely to be non-existent.
About 50% of the deal is also said to have swapped back to Won, with observers commenting that local investors gained a roughly 30bp pick-up over domestic lower tier 2 comparables after the basis swap is taken into consideration.
KorAm officials comment that they are extremely pleased with the success of the deal, which has enabled the bank to gain a maturity extension that would not be possible in the domestic market where upper tier 2 debt is not yet allowed and bank sub debt has not been pushed out beyond the five year and nine month mark.
Given the way that domestic yields have backed up, the bank has also managed to increase its cost savings. In the domestic market, for example, the bank's comparable Won100 billion five-and-a-half year lower tier 2 deal is currently yielding about 8.5%, up from 6.8% when KorAm first announced plans to tap the international dollar market in mid-October, when it had a target yield of 7% and indicative spread of 350bp over Treasuries.
Some observers have questioned why domestic investors would want to asset swap KorAm at a 230bp tighter spread than Hanvit and other comparables such as Cho Hung or KEB. Korean experts say that this is because KorAm has been able to successfully arbitrage different credit perceptions. Whereas international investors are said to prefer Hanvit, Cho Hung and KEB because of their government ownership, local investors prefer the more profitable and efficient tier 1 banks such as Kookmin, Shinhan and KorAm.
KorAm is now hoping to capitalise on the deal with the launch of a $150 million hybrid tier 1 issue. Officials say that the bank has been promoting the idea to the government for the last six months because it does not want to kill its return on equity by issuring common or preferred stock. Keen to maintain a tier 1 capital ratio above 6%, it believes that a hybrid is the most cost-efficient solution.
As one official explains. "During the first half of the year, our total CAR stood at 10.6% of which 6.3% was tier 1 equity and 4.3% tier 2 debt. Since then, we have increased our asset base through expanding our consumer lending and credit card businesses. This means that our tier 1 capital ratio has now fallen to 5.4%, although our tier 2 ratio is up to 5.2% following the completion of the sub debt deal."
In a bid to increase profitability, the bank is hoping to achieve a 50/50 ratio between corporate banking and consumer lending. In the past, the ratio stood at 70/30 in favour of corporate banking and is currently at 60/40. Officials say that, having originally targeted a three year time span to achieve balanced ratios, the bank believes it might be able to meet the deadline within two.
Following the sale of a 50.1% stake to a Carlyle and JPMorgan led consortium at the end of last year, KorAm has moved aggressively to clean up its balance sheet. Previously the bank had been badly hit by the collapse of its founding shareholder, the Daewoo group, to which it had W1.2 trillion in loans outstanding.
Most of this exposure was written off during the first half of the year and officials say that the remainder, which comprised exposure to Daewoo Motor, has been written off during the second half. The bank has also aggressively provisioned itself against exposure to Hynix and now written off 72% of its Won 190 billion exposure. NPL's have also been bought down. Having reported a 6.74% level by the end of the first half, the bank had been hoping to reduce the figure to 2% by year-end, but now says that 3% is more likely.
