Roadshows for a $300 million tier one preferred securities transaction (TOPS) start today (Tuesday) in Hong Kong, moving to Singapore on Wednesday and London on Thursday, with pricing scheduled for either later that day or Friday. JPMorgan is global co-ordinator of the perpetual step-up 10 offering with Barclays as joint bookrunner. Fees total 1.3%
The deal follows a Won400 billion ($300 million) upper tier 2 transaction, which was priced just over a week ago. The 10 non-call five deal was placed domestically by Hana Securities, JPMorgan and Morgan Stanley at a blended yield of 7.49%, equating to about 200bp over on a dollar Libor basis.
Both deals have been prompted by Hana Bank's merger with Seoulbank and the creation of New Hana, which requires a capital top-up to take account of buy-backs of minority shares and a government share overhang. They are likely to be followed by a similar $200 million tier 1 issue by Korea Exchange Bank, which has also been sounding the market this week, but is said unlikely to launch until next week at the earliest, since the FSS (Financial Supervisory Service) has yet to decide whether to allow the bank a special exemption from dividend suspension triggers.
Hana's issue will represent one of only a handful of hybrid deals from Asia, where previous issuance has been dominated by the region's highest rated banks - DBS, HSBC and Standard Chartered. However, it does have clear pricing benchmarks since Korean banks were active issuers of lower and upper tier 2 deals in the years following the Asian crisis in a bid to replenish their depleted capital ratios.
The main pricing benchmark will be Hanvit Bank's March 2005 upper tier 2 deal, which was trading yesterday at 116.5% to yield 4.87%, equating to 286bp over two-year Treasuries or 251bp over Libor. As a rough rule of thumb, Korean specialists say a maturity extension out to 10-years would require a further 25bp and that investors would typically expect a 1% to 1.25% premium for a tier 1 over an upper tier 2 deal.
This means that on a Libor basis, Hana could expect to pay about 370bp to 400bp over, equating to 423bp to 448bp in Treasury terms and a headline coupon of about 8.45% to 8.7%. At these levels it will offer the highest coupon of any Korean issuer outside the distressed universe and will price just inside the Philippines curve and only 90bp tighter than a shorter dated deal by CCC/B3 rated Bank Mandiri. After year ten, the deal will step up by a ratio of 50% of the initial spread.
Key to Hana's deal is the fact that it has been assigned an investment grade rating from one of the agencies. Fitch announced yesterday that it had assigned a BBB- rating, while Standard & Poor's is expected to confirm a BB+ rating, two notches below the bank's senior rating. Moody's will not assign a formal rating to the deal, but given the agency's senior rating of Baa2, this would imply a Ba1 rating.
Because Hana has been able to achieve one investment grade rating, the leads will be able to place paper with domestic insurance companies, which are said likely to provide a strong backstop bid. For international accounts, the main selling point comes from upwards ratings momentum and the leveraged play that Hana will offer to Korean growth.
On a stand-alone basis, the leads are also likely to argue that Hana combines high yield with low risk. Hybrids rank junior to both subordinated and senior creditors in the event of a default and issuers have the option to defer coupon payments if a bank fails to make a common share dividend. This is the main difference between a hybrid instrument and upper tier 2 deal, since coupons are re-paid once dividends are resumed for an upper tier 2 deal, but not for a hybrid.
And as Fitch pointed out in its ratings release, Hana has never failed to pay a dividend since its establishment in 1971. Specialists also say that Hana has been the only Korean bank able to maintain capital ratios above 10% throughout the entire Asian crisis. According to Barclays' research, New Hana had an overall capital ratio of 10.3% as of September this year and a tier 1 ratio of 6.3%.
The new deal is expected to top the bank up to 6.5% by the end of the fourth quarter, after taking into account profit growth across the quarter and a need to buy-out minorities. Under the terms of the merger with Seoulbank, Hana's minority shareholders had the right to sell shares back to the bank if they opposed the agreement. Pre merger, Hana had a freefloat of 43.2% and 16% of shareholders are said to have been bought out at Won17,252 per share, equating to a $300 million equivalent capital hit.
Under the terms of the agreement, the bank also entered into a share swap agreement with the Korea Deposit Insurance Corp (KDCIC) at a price of Won18,900 per share. At the end of an 18 month buy-back period, the government will be left with a 30.9% stake in the merged entity, which has displaced the Shinhan group as the nation's third largest behind Kookmin and Woori.
Fitch has taken a positive view of the merger. In its ratings release it commented, "Seoulbank has a generally clean balance sheet after taking large loan losses in recent years and the acquisition offers opportunities for revenue enhancements and efficiency gains."
The agency also calculates that the combined impact of the tier 1 and tier 2 issues in addition to the bank's retained earnings should leave Hana with an overall CAR of 11% at the end of the financial year.
For KEB, which is hoping to follow Hana, the main uncertainty lies with the FSS's attitude to dividend suspension triggers. The bank has mandated Merrill Lynch to lead a TOPS deal, but the transaction has been complicated by the fact that KEB has not been paying a dividend while it tries to re-build its retained earnings.
Specialists say the FSS is considering whether to allow capital regulations rather than dividend suspension as the trigger allowing a bank to suspend coupon payments. This means that KEB will be able to halt coupon payments if its capital ratios dip below a certain level, which is likely to be set at 10%. However it does so, the FSS will be the only regulator worldwide to show such lenience and the proposed move is already attracting criticism.
However, it is not completely without precedent since the UK allows domestic banks to issue a weaker form of capital to hybrids using capital ratios as the main trigger. In this instance, however, coupons are cumulative, which means that banks have to re-imburse investors at redemption for missed payments. The UK banks have also used call structures rather than step-up structures and are further penalized, as coupons beyond the first call date have to be paid for with fresh equity rather than cash.
In the secondary market, KEB's June 2005 upper tier 2 deal is currently trading at a 50bp premium to Hanvit and bankers argue that a tier 1 deal might have to pay a premium over and above this. At yesterday's close the deal was yielding 5.27% or 325bp over Treasuries.