Industrial Bank of Korea prices $1 billion bond

The relentless invasion by South Korean borrowers into Asia's debt capital markets continues, reinforcing their domination of the territory.

Industrial Bank of Korea (IBK), which is 51%-owned by the state, is the latest Korean issuer to bring a US dollar deal, pricing a $1 billion benchmark bond early this morning, Hong Kong time.

The bond pays a coupon of 7.125% and was priced at 99.265 to yield 7.303% to a maturity date of April 23, 2014. This translates into 500bp over mid-swaps or 556.6bp over the five-year US Treasury yield. Initial price guidance at the beginning of the week had indicated a range of 525bp-550bp over mid-swaps.

Prior to IBK's transaction, Korean issuers had raised $9.14 billion from nine issues in G3 currencies so far this year, out of a total volume of $17.2 billion raised by 17 Asian borrowers, according to data provider Dealogic.

At close of business in Hong Kong yesterday, the $2 billion five-year bonds issued in January by state-policy banks, Korea Development Bank (KDB) and Export-Import Bank of Korea (Kexim), were both bid at about 505bp over US treasury yields. A Singapore-based fund manager reckons that a new issue premium of 25bp-30bp would need to be paid by these banks if they were to come to market again now; so, extrapolating, IBK has paid an additional premium of just 20bp.

The regulation S, rule 144A senior notes are rated A2 (stable outlook) by Moody's Investors Service, single-A (stable) by Standard & Poor's, and A+ (negative) by Fitch Ratings, and will be listed in Singapore. The joint bookrunners are Barclays Capital, Citi, Merrill Lynch and Morgan Stanley. That makes it five out of six for Citi, which has been a lead manager for all the Korean dollar deals this year, except KDB.

The IBK issue was about six times subscribed. Around half of the bonds were placed in Asia, 40% went to US accounts and 10% to Europe. Fund managers took 50%, banks bought 27%, insurance companies and pension funds 9%, retail 4% and the remaining 10% was allocated to "others".

Like KDB and Kexim, IBK's issue is not supported by a government guarantee. However, the lead managers argue that there is implicit support because the bank is majority-owned by the state, making it a "quasi-sovereign" -- an expression which is reassuring but at the same time cuts no ice with fund management compliance officers. Legally, it is meaningless. Yet, the bonds will be considered to be in default if the government cedes majority ownership or financial backing.

The Republic of Korea raised $3 billion last week with two equal-sized tranches of five- and 10-year bonds. The shorter-dated paper was launched at 400bp over US Treasuries, and yesterday was trading at 390bp-385bp.

IBK lends to small- and medium-sized enterprises, and so is a key conduit for the Korean government's plans to channel funding to domestic corporates that lack the clout of the major chaebol (or conglomerates), and which are desiccated by the drying up of liquidity in the loan market and struggling to obtain credit in capital markets. But IBK itself had a tough 2008. It stayed in the black, but profits fell 36% compared with 2007 to W764.4 billion ($579 million).