Korean bank credits continue to do no wrong in the eyes of international investors as yet another deal garners a huge order book at an incredibly tight price. IBK is now the fourth bank deal in a row to surpass even the most wildly optimistic of expectations, pricing a $300 million deal yesterday (Tuesday) on the back of a $4.2 billion order book.
Credit Suisse First Boston, HSBC and UBS were lead managers of the lower tier 2 deal, which has a long five-year maturity due May 2014 callable in 2009. Pricing came at 99.639% on a coupon of 4% to yield 4.079%, equating to 138bp over Treasuries or 91bp over mid swaps. Fees total 40bp.
Original guidance was for a $300 million deal with a spread of about 140bp over Treasuries and 100bp over swaps. The spread was tightened, but rather than push it too far the leads decided to slightly lengthen the maturity instead.
Final pricing represents a remarkably aggressive 22bp premium to the bank's senior debt on a like-for-like basis. IBK has a June 2008 bond outstanding that was bid yesterday at 84bp over Treasuries or 66bp over swaps. The curve is worth about 3bp on a Libor basis.
Specialists say this kind of pricing differential between senior and subordinated debt is usually only ever achieved by the world's highest rated banks and that investors would normally expect a mid range investment grade credit like IBK to pay more like 75bp to 100bp over.
So how did it manage it? Specialists put forward three main reasons.
Firstly, the Korean banking sector is still being propelled by strong momentum as investors latch onto to potential M&A transactions following Citigroup's acquisition of Koram. Starting with KDB at the end of February, the market has lapped up deals by Korea First Bank, Hana and now IBK.
Secondly, IBK decided to do a 144a transaction and broadened distribution to US investors that have not really had access to the bank's paper in the primary market in recent years. By geography, the huge order book had a split of 33% US, 31% Europe, 29% Asia and 7% Korea.
A total of 162 accounts participated, with a split of asset managers 69%, banks 16%, insurance and pension funds 12% and retail 3%.
Thirdly and perhaps most importantly of all, investors are said to have paid little heed to the deal's subordination and looked at the yield against comparably rated credits in the Korean senior debt universe.
IBK's tier 2 deal has a BBB/BBB+/A (Fitch) rating. Both Moody's and Standard & Poor's have assigned a sub debt rating one notch below senior debt, while Fitch has rated both the same. The latter attributed its decision to the sovereign's unequivocal support of the bank.
As a result, some investors are said to have looked at comparably rated credits such as Kookmin. Korea's largest commercial bank has an A3/BBB+/A- (Fitch) rating, which is one notch higher than IBK on an absolute basis taking into account all three agencies.
Kookmin's December 2007 bond is currently trading at 81bp over swaps. Taking into account about 5bp to 6bp for the curve, Kookmin is trading about 4bp tighter on a like-for-like basis.
As of September 2003, IBK reported an overall CAR of 10.4% of which 8.1% constituted tier 1 equity. The new deal should, therefore, re-balance its CAR and marginally improve ROE.