A new subordinated dollar bond offering was priced yesterday (Tuesday) for KorAm Bank. Led by Salomon Smith Barney, the $200 million 10 non-call five lower tier 2 transaction was priced at par with a coupon of 5.64% to yield 260bp over Treasuries.
On a like-for-like basis, pricing was said to have come about 15bp through the secondary market trading levels of lower tier 2 issues for both Hanvit and Cho Hung Bank, despite the fact that KorAm has a one notch lower rating of Ba1. Hanvit, for example, has an outstanding 11.75% lower tier 2 deal that is two-and-a-half years shorter than KorAm. This was quoted yesterday at 116.75% to yield 240bp over Treasuries.
However, pricing was nowhere near as aggressive as a debut subordinated dollar bond issue for KorAm last December, which came about 230bp through the then trading levels of Hanvit and Cho Hung.
The reason why KorAm has been able to repeat such a feat, albeit not quite so spectacularly, is twofold. Firstly, Salomon followed a similar strategy to last December, when it married Eurobond documentation with domestic placement. Secondly and more fundamentally, KorAm has always been more highly regarded domestically than internationally. Consequently, Salomon has able to exploit an offshore/onshore credit disconnect and in December was also able to take advantage of a similar arbitrage in the cross currency swap market, which allowed domestic investors to pick up dollar paper at attractive yields relative to domestic comparables.
This time round KorAm has been unable to get quite such attractive pricing because the won/dollar swap has moved against domestic investors and there is less incentive to swap the paper back to Won, although a number of investors are said to have done so. When the first deal was completed, Hanvit and Cho Hung were also both trading extremely wide and since then have seen spread levels almost halve, in the process completely closing the orginal pricing gap with KorAm
In December, for example, Hanvit's 12.75% upper tier 2 deal was bid at about 494bp over Treasuries. Yesterday it was bid at about 252bp over.
By contrast, KorAm's $160 million upper tier 2 deal was priced in December at 284bp over Treasuries on a coupon of 6.95%. Yesterday one banker said a recent trade had been completed at 283bp over, while another was quoting the bond as wide as 377bp over.
The wide differential between the two can be explained by the fact that most bonds in the Korean sub debt universe, with the exception of the KorAm upper tier 2 deal, trade very technically. Almost all are being quoted on very high cash prices of 116% to 118%. KorAm, on the other hand, is highly illiquid because the majority of paper was placed onshore and is not well bid in the secondary market. Those traders reporting wide Treasury spreads are still quoting it around par.
Where the new deal is concerned, observers report the participation of about 17 investors, with about 80% of the paper placed in Korea and the remainder in Asia and Europe. About 80% of bonds went to a combination of pension, insurance funds and money managers, while 20% went to banks.
The placement pattern marks a small step forwards from December when virtually the entire deal was placed in Korea. But liquidity is similarly likely to be extremely patchy and the potential for upside slim should traders once again regard the deal as an unusual hybrid, which few will then actively follow.
But for those investors, which like the KorAm credit story, the new deal affords an opportunity to pick up paper in the kind of size the secondary market does not allow. Few would also disagree that KorAm is one of Korea's most highly regarded banks and many analysts believe its lower rating is mainly a function of the bank's smaller size and uncertainties over the timing of the Carlyle group's exit from majority ownership.
On a stand-alone basis, the bank always maintains strong ratios and its strong management, low NPLs and clever strategy have always played well with domestic investors. Over the first half of the year, NPLs, for instance, fell from 2.7% to 1.5%, while net interest margins increased from 2.84% to 3.23%.
As a result of the new bond deal, the bank should have now raised its overall CAR back to the high international standard it sets itself (12%). At the end of the first half, it reported a CAR of 11.17%, of which tier 1 accounted for 6.96%.
