BOCI scores sole with Korean Air perp

The South Korean national carrier joins a region-wide rush to sell perpetual bonds, drawing $900 million of demand for its maiden deal.

Korean Air Lines sold a $300 million perpetual bond on Monday, joining a recent rush of Asian issuers sellings making the most of demand for hybrid bonds.

Bank of China International (BOCI) was the sole global coordinator of the bond, marking the first time a Chinese bank has sole-led a G3 bond for a Korean issuer. But the bank did not have an easy passage to market, approaching investors in mid-May after Korean Air Lines announced plunging first quarter profits.

The carrier told investors on May 16 that its operating profit had fallen 41% year-on-year during the first quarter. According to its latest quarterly results, the sharp drop in profits was due to rising fuel costs and the dwindling number of passengers travelling between South Korea and Americas, Japan and China.

BOCI navigated the problem by ensuring strong anchor demand from inevstors before officially launching the deal, after holding a roadshow with investors in Hong Kong and Singapore last week. The bank set up around 35 meetings for the issuer, said a person familiar with the matter.

Korean Air’s strategy to solely mandate a Chinese bank suggests mainland institutions are expanding beyond their traditional client base, and are now looking to take a bite out of the Asia ex-China revenues of global banks.

In that sense, it was a good start for Chinese institutions with regards to Korean clients. BOCI managed to generate $1 billion of demand at the peak level before the book settled at $900 million from 51 investors.

The unrated company priced the non-call three-and-a-half year bond at par to yield 6.875% on Monday, after initially pitching the transaction at the 7.125% area in the morning.

If the group decides not to redeem the bond on its first call date on December 12, 2020, the coupon rate will be reset to three-year US Treasuries plus an initial margin of 544bp — as well as a 500bp step-up.

In the event of covenant breach or a default of its senior bonds, investors will receive another 500bp step-up, according to a term sheet seen by FinanceAsia.

Bankers used Hong Kong Airlines’ 7.125% perpetual bond as a major benchmark. The unrated note was trading at a cash price of 98.75 to yield 7.6% on Monday morning, according to a syndicate banker.

“It was hard to draw a direct comparison between the two because of the differences in size and the level of disclosure,” the banker said.

In the secondary market, the par-priced bond was slightly up on Tuesday morning, trading at a bid of around 100.15, according to market data.

Asian investors took almost the entire deal, leaving the remaining 2% to European accounts. Funds and asset managers were allocated 54%, private banks 39%, banks 5% and corporations and other investors the remaining 2%.

According to Dealogic, issuers in Asia ex-Japan region have raised $15.8 billion worth of US dollar denominated perpetual bonds so far this year, which is already 90% of the full-year hybrid volume throughout 2016.

¬ Haymarket Media Limited. All rights reserved.
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