Department store operator Shinsegae sold a maiden $300 million perpetual bond that is callable in year five late on Tuesday, marketing the instrument during a national holiday and keeping the Korean pipeline flowing after a weak start to the year.
Guaranteed by Kookmin Bank, Korea’s largest bank by assets, the A rated hybrid notes priced with a yield spread of US Treasuries plus 125 basis points, which is 25bp tighter than the initial price guidance of Treasuries plus approximately 150bp, according to sources familiar with the matter.
Shinsegae’s Reg S-only hybrid bond, the first from a Korean issuer this year, comes with investor-friendly terms.
If the securities are not called by the issuer on the first call date or if it is declared bankrupt, the guarantor Kookmin Bank will purchase all outstanding notes at their principal amount together with all accrued interest and any outstanding deferred interest payments.
Year-to-date Korean issuance of dollar-, euro- and yen-denominated bonds is half what it was this time last year, according to Dealogic data. But April was busy, with seven Korean deals coming to market, the last being state-owned energy firm Korea Resources, which raised a $350 million five-year bond on April 23.
In an April 24 note, Fitch said the guarantee on the Shinsegae bonds would terminate on the first call date, making that the effective maturity date of the securities.
Based on its interpretation of the terms, Fitch said all bondholders will execute the "no-call-put right" of the notes on the first call date due to the termination of guarantee. That right states that if the issuer elects not to redeem the notes on the first call date, each holder has the right to sell the note in whole to the guarantor.
“As such, we see no extension risk beyond five years for this perpetual bond,” said Hong Kong-based Mark Reade, fixed income analyst at Mizuho Securities.
Moreover, although coupon payments are deferrable at the discretion of the issuer, they will be subject to a dividend stopper — where the issuer will not pay a coupon on another security if it does not pay interest on the bond.
Any deferred interest is cumulative and covered by Kookmin’s guarantee, although only payable at the call date, according to Shinsegae’s prospectus.
Coupon payments are fixed until the first call date and thereafter reset every five years at rates equivalent to the five-year US Treasury yield plus an initial spread and a step up of 100bp, a source familiar with the matter told FinanceAsia.
The last Korean issuer to raise a dollar hybrid offering was SK E&S, which sold a $300 million perpetual bond that's callable in year five last November.
Closed for business
Some credit analysts warned that marketing the bond over a public holiday in Korea may not be wise.
“With many onshore investors potentially struggling to buy this subordinated, credit-enhanced structure — the fact that today is a public holiday in Korea — doesn’t bode well for onshore support and many other investors likely to be put off by the small deal size, we don’t see huge upside for fast-money accounts unless it prices closer to initial guidance,” a Hong Kong-based credit analyst said, who saw fair value for Shinsegae’s bond at around Treasuries plus 120bp.
“[This is] especially in light of the heavy pipeline of higher-yielding Asian investment-grade US dollar bonds set to print in the next fortnight,” the analyst added.
The nearest comparables for Shinsegae’s offering includes Kookmin Bank’s existing notes maturing in July 2017, which traded at a G-spread of 97bp. Other comparables include A1/A- rated Woori Bank and A- rated Doosan Heavy Industries & Construction’s outstanding bonds expiring in July 2020 and October 2042, respectively, which traded at G-spreads of 90bp and 210bp.
Shinsegae is Korea’s second-largest department store operator with ten high-end department stores, three premium outlets, and a domestic market share of 21%.
Listed on the Korea Exchange with a market capitalisation of W2.1 trillion ($1.9 billion), Shinsegae is 27% owned by the family of the company’s chairman, which also owns 27% of Baa2/BBB+ rated E-Mart, the largest retailer in Korea.
Citi is the sole book runner on Shinsegae’s deal.
