Cho Hung and Woori offering launched

After a few days delay, the $500 million transaction begins roadshows in Hong Kong today (Friday).

As expected the four-year deal has a highly defensive structure, which guarantees investors a fixed yield for a two-year period whether or not trigger events occur that turn the transaction from a straight debt instrument into an exchangeable.

What happens with most going-public bonds is that investors receive a fixed yield and no equity optionality until a trigger event, which sees them give up some yield in return for the value of an equity option and exchange rights. From the borrower's perspective, normal debt funding costs are maintained until a trigger event, at which point a lower cost of debt funding is secured in return for ceding equity optionality.

In this case, however, investors are protected right through to the two-year put option and receive a free equity option if one of the trigger events occurs. This is because a trigger event will result in a downward adjustment in the coupon, but is matched by an equal upward revision in the put price. Investors are further protected by the fact that the Korean government is not able to call the deal and force conversion until after the put option falls due.

The four-year deal in the name of the Korea Deposit Insurance Corp (KDIC) has a premium redemption structure and is being marketed with a fixed coupon of 2.5% and conversion premium of 12% to 18%. There is a two-year put at 150bp to 180bp over Treasuries, representing a current yield of 4.55% to 4.85%. Premium redemption will come at the same level. Should one of two trigger events occur, the coupon will be adjusted downwards by 25bp to 75bp.

The two trigger events, which change the deal from a bond to an exchangeable, are defined by free float thresholds for Woori Financial Holdings, which has yet to be listed and Cho Hung Bank, which already is. What is termed in the deal's documentation as a Qualifying Public Offering (QPO) constitutes a free float that must be two times the face value of the notes on pricing date. This means that the free float of either Cho Hung or Woori must stand at $1 billion on the pricing date of any government sell-down.

Cho Hung currently has a free float of about $400 million and the Korean government has the option to increase this to $1 billion either through one jumbo equity placement, or through a number of small-scale deals. To trigger the deal, however, the last sell-down must be no less than $200 million in size and be placed with at least 100 non-affiliated institutional investors. In this way, investors are reassured that the government cannot simply trigger the deal by manipulating the free float.

Once a QPO has occurred, the government has option to call the bond 18 months after the offering at 130% of the conversion price. The conversion price is determined as the lower of the QPO price, or the weighted average price of the stock over 10 days trading volume post QPO.

Bankers explain that whereas investors would normally expect to pay three to five option points as an entry price to the stock, they pay virtually nothing in this transaction. Although there is a nominal option amount (less than 0.5 points) prior to the QPO, the deal should be viewed as straight debt.

The key criteria for most investors will, therefore, be how wide the deal prices relative to outstanding sovereign-related comparables in the Korean credit universe. At the tightest end of the range (150bp), the deal offers a 30bp pick-up to the bid spread of the Korea Development Bank's November 2003 transaction, currently trading at 120bp over Treasuries.

KDIC itself has no straight debt outstanding, although bankers say that four-year paper is trading at roughly 165bp over Libor in the asset swap market. On a like-for-like basis, this means that the new deal is coming at a 50bp to 60bp premium.

Under the lead management of Goldman Sachs, JPMorgan and UBS Warburg, presentations will continue in London on Monday and New York on Tuesday, before pricing on Wednesday.

Initial placement is likely to be highly geared to towards fixed income investors, with little participation from hedge funds that have nothing to arbitrage against. Bankers believe that credit demand is likely to be extremely strong, although critics argue that the deal is still little more than window dressing and will never have true equity value.

However, from the government's point of view the deal has symbolic importance. At the very least, it will satisfy its desire to show market observers and particularly the IMF that it is doing something to reduce its massive holdings in the Korean financial sector and sort out the problems of its second and third largest banks by assets.

Cho Hung, for example, has strongly outperformed the Korean equity market year-to-date, rising 96.71% to Thursday's Won 3,285 close, against a 24.621% rise in the overall index.

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