IBK and NACF re-engage sub debt investors

Korean state-owned banks launch subordinated dollar deals.

The closure of a small scale $200 million lower tier 2 deal for the Industrial Bank of Korea (IBK) on Tuesday has prompted the National Agricultural Co-operative Federation (NACF) to piggy back on its success with the re-launch of a $250 million lower tier 2 deal, which should price later today (Thursday).

Deutsche Bank and UBS were lead managers of the BBB/BBB+A (Fitch) rated Reg S deal for IBK, which was priced at 99.738% on a coupon of 5.75% to yield 5.804%. This equated to 187bp over Treasuries, or 120bp over Libor. Fees were 35bp.

IBK's existing lower tier 2 deal of March this year was said to be trading on an issue price of 93%, Treasury spread of 157bp and Libor spread of 120bp at the time the new deal priced. The original deal was printed with a far tighter 4% coupon, equating to a launch spread of 138bp over Treasuries, or 91bp over Libor.

The new deal had a slight structural tweak that saw it incorporate a six-month longer final maturity of 10.5 years and a call option after 5.5 years. Observers say this was so designed, because the steepness of the Treasury curve between 10 and 10.5 years allowed investors to reap an additional 18bp, while the flatness of the Libor curve meant the borrower had to cede almost nothing.

When IBK printed its debut sub debt deal in March, it came at an aggressively tight 22bp premium to the bank's outstanding senior debt. IBK has a June 2008 bond that was trading yesterday at 85bp over Treasuries and 63bp over Libor. On a like-for-like basis, the new deal has come at a much wider premium of about 50bp over the old.

However, the original deal came at the high water mark for Korean paper so far this year and has traded down ever since. Analysts say a 50bp differential is more in line with normal pricing precedent.

Back in March, IBK's $300 million sub debt deal attracted an order book of over $4 billion. In June a $200 million deal attracted an order book of $800 million.

Bankers nevertheless believe this is still an achievement in the context of difficult market conditions and the failure of a sub debt deal for NACF only a week ago. Since NACF was pulled, IBK has continued to widen and is out about 6bp over the week on a Libor basis.

About 60 accounts are said to have participated in its new deal, with a geographical split that saw 36% placed into Asia, 25% into Korea, 10% into the US and 29% Europe. By investor type, asset managers took 56%, banks 26%, pension and insurance funds 10% and retail 8%.

NACF now hopes to be able to take advantage of the momentum created by IBK and is scheduled to return today with a scaled down $250 million lower tier 2 deal via ABN AMRO, Credit Suisse First Boston and HSBC. Barring an unforeseen market crash, the deal looks likely to price on schedule as fund managers say it is already two times oversubscribed.

The leads have gone out with indicative pricing around the 140bp level over Libor. This is 15bp to 20bp wider than the deal's indicative level last week when it failed to garner a full order book for $350 million.

Pricing seems generous but is in line with the 15bp to 17bp premium that NACF normally trades at relative to IBK in the senior debt sector. Both credits have the same rating, but IBK has an explicit government guarantee, whereas NACF does not.

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