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The Republic of Korea returned to offshore debt markets on Wednesday with a rare $1 billion bond, aimed at paving the way for other South Korea issuers to tap the market.
Asia's credit markets have been volatile since Ben Bernanke hinted that the Fed would reduce its vast purchases of US Treasuries in May, spelling an end to low interest rates. The Korean sovereign was the first borrower to tap the market after the summer lull.
“We sought to establish a liquid benchmark for other Korean issuers,” Heenam Choi, director general of the International Finance Division at Ministry of Strategy and Finance of Korea, told FinanceAsia. “We felt Korean issuers could benefit from a new benchmark from the sovereign with a healthy supply of bonds out of Korea expected for the remainder of the year,” he added.
Shortly after it tapped the market, two Korean issuers - GS Caltex and Woori Bank - announced roadshows.
Investors have mostly bought exposure to South Korea's credit through its policy banks, so the sovereign bond was a rare chance to buy the credit directly. The sovereign will be using the funds to refinance a dollar bond that matured in June this year - its first dollar maturity during the past four years, which explains the sovereign's absence from the market.
The Republic of Korea has about $7 billion of outstanding foreign currency bonds, of which $2.5 billion matures next year, so it could return as soon as next year. “We will have to wait for the approval from the National Assembly, before we can move on with any funding plan next year,” said Choi.
South Korea has benefited from some of the volatility in the market, as it is seen as a high-grade borrower. While peers India and Indonesia have been hit by emerging market outflows, South Korea is seen as a safe haven.
However, some analysts do question its fundamentals. “There is a scarcity of AA paper in Asia," says one Singapore-based credit analyst. “But personally, I'm not as bullish on Korea, we have seen some defaults in the loan markets and non-performing loans have been rising,” he added.
The leads - Deutsche Bank, Citi, Goldman Sachs, HSBC, KDB and Woori - went out with initial guidance for the 10-year bond at the area of Treasuries plus 135bp on Wednesday morning.
The outstanding Kexim 2022s were trading at Treasuries plus 112bp and, after adjusting for the curve, it was trading at Treasuries plus 135bp. The leads used this as the starting point for Korea's bond.
There was a significant tightening in the pricing, with the bonds finally printing at Treasuries plus 115bp, 20bp inside of initial guidance and at the tight end of the final guidance. Investors were told that the deal size would not be more than $1 billion, and this gave them some comfort.
The bonds priced about 20bp inside of Kexim's secondary curve and in secondary markets the Republic of Korea's bonds tightened to Treasuries plus 112bp/111bp on Thursday.
Investors put in $5 billion worth of orders, and there was strong participation from Asian investors, which were allocated 59%. US investors took 25% and European investors 16%. Central banks and sovereign wealth funds scooped up 33%, pension funds and insurance took 20%, fund managers 36%, banks 10% and private banks 1%.
Following South Korea's sovereign bond, GS Caltex announced roadshows in Asia and the US during the week of September 9. Bank of America Merrill Lynch, Citi and Goldman Sachs are the arrangers. Meanwhile, Woori Bank has mandated Barclays, Citi, Deutsche Bank, HSBC, JP Morgan and Standard Chartered as arrangers for roadshows to start next week.
