KT Corp raised a $1 billion dual-tranche bond on Monday, defying weaker market sentiment as investors clamour for high-quality South Korean notes that enabled the borrower to redefine its yield curve.
The company, formally known as Korea Telecom, sold $650 million three-year and $350 million five-year tranches, targeting investors both in the Reg-S and Rule 144A market – includes US investors, according to a term sheet seen by FinanceAsia.
KT’s transaction comes at a time when market confidence is much weaker on the back of disappointing US earnings sentiment. Financial analysts expect earnings for companies in the Standard & Poor's 500 to drop 1.6% from a year earlier, according to FactSet, a financial data provider. That was a reversal from the start of the year, when they expected a jump of 4.3%.
Also, global markets suffered over jitters about the crisis in Ukraine, where Ukrainian and Western officials have accused Moscow of instigating a pro-Russian insurgency in the eastern part of the former-Soviet state.
As a result, Asia high-yield cash spreads widened by 6bp while the region’s investment-grade space widened by 3bp over the past week, according to Morgan Stanley.
Nonetheless, KT’s transaction managed to price at attractive levels, obtaining a total order book of about $4 billion from more than 160 accounts. Such buoyant demand should encourage more Korean corporates, with strong refinancing needs, to tap the dollar bond markets, say experts.
“Korea is being accepted by the US investor base as an increasingly high-grade geography in Asia, similar to Japan in a way,” said a Hong Kong-based high-grade syndicate banker to FinanceAsia. “As a result, Korean corporates are getting very tight funding levels.”
For example, A+/AA-/Aa3 rated South Korea is currently trading 30bp tighter than similarly rated China, despite being the world’s second largest economy, adds the syndicate banker. BBB+ rated Hyundai Capital’s recent three-year floating-rate note priced very close to higher-rated Chinese state-owned enterprise Sinopec’s bond (rated A+ by Standard & Poor’s) of similar tenor and structure, resulting in only a 2bp difference.
“Korean issuers are looking to refinance, re-benchmark and reposition, which leads to attractive opportunities,” he said.
According to data compiled by the Korea Center for International Finance, an estimated record $30.7 billion-worth of bonds sold overseas by local lenders, firms and the government falls due this year, up from $20.4 billion a year earlier.
Year-to-date, South Korean corporate borrowers have raised $5.2 billion dollar-denominated bonds, which is seven times more than last year’s $718 million during the same period, according to Dealogic data.
Pipeline
And the pipeline continues to swell. Korea Land and Housing Corp mandated Bank of America Merrill Lynch, Crédit Agricole, Deutsche Bank, JPMorgan and The Royal Bank of Scotland to arrange a series of fixed-income investor meetings globally that commenced on April 14. A dollar-denominated bond offering could follow after subject to market conditions.
Korea Resources, jointly with its majority-owned subsidiary, Minera Metalurgica del Boleo, has hired BofA Merrill, Citi and HSBC to also arrange a series of meetings commencing on April 16.
Aside from corporates, Korean financial institution Woori Bank has mandated Barclays, BNP Paribas, BofA Merrill, Crédit Agricole, HSBC, JPMorgan and Nomura to arrange the meetings which also commenced on April 14.
Re-pricing the corporate curve
KT Corp’s three- and five-year offerings priced at Treasuries plus 100bp and 110bp, which is around 20bp tighter than their initial price guidance, according to a term sheet seen by FinanceAsia.
The nearest comparables for KT’s three-year tranche were its existing bonds maturing in 2017 that were trading at a G-spread of 107bp prior to announcement, indicating that the new transaction priced deep inside its existing curve, said a source close to the deal.
For its five-year note, the source highlights that, on an adjusted curve basis, the general yield pickup between the three- and five-year tenors should be 15bp-20bp for similarly-rated credits from the same sector. However, KT’s yield pickup between both maturities was only 10bp.
“KT’s curve is an extremely flat curve,” said the source. “This is a great outcome for the company, enabling it to re-price its curve.”
The three-year deal received large participation from US investors, which accounted for 70% of the notes, while the five-year bond had reasonably balanced participation from both US and Asian investors, which subscribed to 35% and 40% of the paper respectively.
Both tranches obtained high-quality institutional investor participation with asset managers subscribing to 78% and 51% of the three- and five-year offerings respectively, while financial institutions bought 10% and 21% respectively.
In the secondary market, the three-year bond is 1bp tighter, while the five-year note is 2bp wider due to weaker market sentiment, said the source.
BofA Merrill, Citi, Deutsche Bank, Goldman Sachs and HSBC were joint bookrunners of KT’s transaction.
