KT Corp returned to the bond markets for the first time in two years on Tuesday with a deal that looks set to benefit from the same momentum that propelled primary market order books for three new G3 deals on Monday and strong secondary market trading when they broke syndicate on Tuesday.
The Baa1/A-/A- rated telecoms group raised $400 million from a capped 10-year deal, which attracted a peak order book of $4.25 billion and final order book of $3.5 billion, according to one syndicate banker who said demand was led by Asia, followed by the US.
This was not quite in the same league as the $10 billion peak order book that Baa1/A-/BBB+ Kia Motors garnered in mid-April, the last time a private sector Korean corporate entity completed a long-dated offshore deal.
But KT Corp’s Reg S/144a offering does contain the same successful ingredients, which should underpin secondary market trading. It is a rare corporate credit with a well-known brand name and offers a long-dated structure that provides investors with the added bonus of a turnround story.
Kia Motors' 10-year deal immediately tightened 30bp when it opened in secondary trading due to limitations on placement to domestic accounts. Syndicate bankers also believed KT Corp will trade well but argued that it has been priced close to fair value, although since it has little paper outstanding they added that this is hard to pinpoint.
Indicative pricing was pitched at 135bp over Treasuries before being tightened to a final range of 110bp to 115bp over.
Final pricing was fixed at 99.279% on a coupon of 2.5% to yield 110bp over. A total of 147 accounts participated, with 65% from Asia, 23% from the US and 12% from Europe. By investor type funds took 48%, insurers 29%, banks 18%, central banks 3% and private banks 2%.
KT Corp has a $350 million April 2019 bond outstanding but the deal is highly illiquid and bankers argued that it is trading wide.
It was being quoted on a mid-price of 102.61% on Tuesday to yield 1.658% or roughly 98bp over on a G-spread basis.
The most recent comparable is Kia Motors' 3.25% April 2026 deal, which was being quoted on a G-spread of 128bp when KT Corp’s deal was launched during Asia’s morning. The car company has a one-notch lower rating than KT Corp from Fitch and, while it shares the same rating from Moody’s, it is on stable rather than positive outlook.
Syndicate bankers also pointed out that KT Corp carries a triple-A rating in Korea’s domestic bond market, whereas Kia Motors is double-A rated.
The syndicate have priced in an 18bp differential between the two credits to account for the rating differential. In a credit note ahead of pricing, Mizuho suggested fair value lies around the 117.5bp mark but agreed that fair value is difficult to judge and believed the deal may also attract the same “onshore feeding frenzy” that greeted Kia Motors.
Monday’s $900 million offering from Korea Gas (Kogas) has also set a good precedent. The twin 5- and 10-year deal built up a peak order book of $6 billion and final order book of $4 billion, according to distribution statistics.
It also traded well on Tuesday, with the $500 million five-year tranche tightening by about 6bp and the $400 million 10-year tranche by 5bp.
Overall, sales desks reported that most buying activity was concentrated across the new issues, with other names underperforming a big move in US Treasuries. By the end of the New York trading day on Tuesday, 10-year Treasuries had moved by 8bp to 1.51% over the course of the day and were bid around the 1.488% level when KT Corp priced.
“I think this was a good outcome for the issuer,” said one syndicate banker. “They roadshowed in June and were initially looking at printing the deal last week. In the end they decided to wait for the non-farm payroll numbers last Friday, which turned out to be a good call.”
KT Corp has returned to the international bond markets to re-finance debt and has been on a de-leveraging path for the past few years. It returned to profitability in 2015 after two years of net losses and a majority of analysts have a buy recommendation on the stock.
Moody’s put the company back on positive outlook in June, having previously downgraded it by one notch in February 2014. It noted that adjusted debt to Ebitda has dropped from 2.4 times in 2014 to 2 times in 2015 due to asset sales and should decline further to 1.8 to 1.9 times in 2017.
It said it would consider raising the rating if the company can keep the ratio below 2 times on a sustainable basis.
In a recent research note, Korea Investment & Securities said growth in KT Corp’s core business is recovering and its average revenue per user is rising faster than the country’s other two main telecom operators.
KT Corp also recently announced plans to increase profitability by developing its real estate portfolio. Analysts believe this could add 10% to operating profit with overall revenue from the division rising from W250 billion in 2015 on assets of W7.8 trillion to W700 billion and assets of W9.4 trillion by 2020.
Joint global co-ordiantors for the new bond were BNP Paribas, Bank of America Merrill Lynch, Citi and Nomura.
