Korea Midland Power sold a $300 million five-year bond on Wednesday, defying volatile market conditions and encouraging more Korean credits to come to market – such as Korea Gas on Thursday.
The Reg S note – the company’s first in six years in the G3 space and also the first to come to market after the Chinese New Year break – was almost flat to its nearest comparables given its relatively modest size. The paper has a coupon of 2.75%.
Sources added that investors could have demanded a bigger concession for a larger deal of, say, $750 million.
“As far as marketing strategy goes, the fact that they went for a very modest size may have helped to achieve a very tight spread,” added the source. “The Koreans have always been able to price at historically tight levels and investors just can’t get enough because they view it as a safe haven play right now.”
The initial price guidance for Korea Midland’s note was Treasuries plus 155bp but the issuer managed to tighten it by 20bp, offering investors a small premium of 2bp-3bp, according to a source close to the deal.
The nearest comparables for the transaction include Kepco’s other subsidiaries, including Korea East-West Power, Korea Hydro & Nuclear Power and Korea Western Power, which all have existing 2018 notes that were trading at a G-spread of 129bp, 133bp and 132bp respectively at time of pricing, added the source.
Indeed, Korea Midland’s bond – which is now trading at Treasuries plus 128bp a day after being priced – has helped build confidence in the market, encouraging similar credits to come.
Korea Gas is marketing a $500 million 10-year senior unsecured note and is expected to close as early as today (Thursday). The bond has an initial price guidance of Treasuries plus 145bp. Barclays, Bank of America Merrill Lynch, Goldman Sachs, JPMorgan and UBS are the joint bookrunners of the transaction.
Large real money demand
Foreign investors see South Korea as a safe haven given that its current account surpluses and accumulated foreign reserves serve as a defence against cross-border capital flight.
All these factors serve as an ideal backdrop for bond issuance originating from South Korea.
“The South Korean issuers are certainly a standout exceptional bunch that are being viewed more and more as an OECD investment,” said a source.
As a result, the transaction received a whopping order book of more than $2.3 billion from about 150 accounts, according to a term sheet. Asian investors subscribed to 79% of the paper while the rest went to Europe.
There was also large real money participation, notably from funds, which accounted for 55% of the transaction, followed by banks 21%. Insurance companies accounted for 13%, private banks 6% and 5% went to other types of investors, which were undisclosed.
Korean credit is still very much in demand at a time when the market has been somewhat turbulent, with Asian investment grade cash spreads widening by 6bp last week. The Asian high-yield space cash spreads have also widened by 8bp during the same period, according to Morgan Stanley.
South Korea issuers account for 27.6% of total outstanding G3 Asia ex-Japan deals so far this year, following Chinese issuers - which are top in the league tables and account for 30.2% of market share, according to Dealogic data.
Deutsche Bank, JPMorgan and Morgan Stanley were the joint lead managers of Korea Midland’s deal.
