Investors buy IBK bonds despite uncertainty about privatisation

IBK prices a $500 million bond issue after an extensive global roadshow with investors raising questions about the level of government support.
IBK's mandate is to help Korea’s SMEs
IBK's mandate is to help Korea’s SMEs

Korean policy bank Industrial Bank of Korea (IBK) early yesterday morning priced its $500 million 5.5-year bond, following an extensive round of global roadshows that kicked off in Asia on March 4 and ended in the US last week. BNP Paribas, Citi, Morgan Stanley and Royal Bank of Scotland were the bookrunners. IBK Securities was a co-manager.

IBK, whose mandate is to promote the economic activities of Korea’s small and medium-size enterprises, is one of Korea’s policy banks; the others are Korea Development Bank, Korea Finance Corp and Kexim.

The bond priced at a yield of Treasuries plus 183bp, within the final guidance of Treasuries plus 180bp to 185bp. The initial price guidance was Treasuries plus 190bp plus or minus 5bp. The bonds broke at 182bp/181bp over Treasuries, but then softened amid a weaker credit market to Treasuries plus 184bp/182bp.

Other recent issues also weakened, including the Republic of Philippines’ 2026s, which were at a cash price of 99.15, slightly below the reoffer and Yanlord Land’s 2018s which were bid at 99.875, a shade under the par issue price.

IBK's deal gathered a $1.8 billion order book from more than 139 investors. The bonds paid a 3.75% coupon and were reoffered at 99.371 to yield 3.878%.

“IBK is a known quantity in the market. But as KDB is being privatised, investors had a lot of questions about what would happen if IBK was privatised and what the nature of government support would be,” said a banker on the deal.

The Korean government owns 76.3% of IBK through various direct and indirect stakes.

IBK’s bonds offer a change of control clause, which states that if the Korean government ownership drops below 50.1% or if the government fails to provide the financial support to the issuer as stipulated, the bonds are considered to be in default. The government is legally obligated to replenish any deficit if IBK’s reserves prove insufficient to absorb any losses.

However, there is uncertainty as to whether IBK’s bonds will be government guaranteed if it is privatised, as KDB’s foreign currency bonds will be once the bank goes for an IPO.

That said, unlike KDB, nobody expects IBK to be privatised in a hurry. Moody’s senior analyst Youngil Choi said in a report that the discussion to privatise IBK is likely to re-start in the next few years. “However, given the importance of the SME sector to the Korean economy, the decision to do so would be politically controversial and subject to lengthy debate,” she added.

In the event that IBK is privatised, Nomura analyst William Mak expects the government to provide an explicit guarantee for all of IBK’s existing foreign currency bonds. However, he added in a research note, that because this is conjecture rather than a certainty, “we think the IBK bonds should continue to trade around 10bp wider than KDB to duly compensate investors.”

IBK’s new bonds due September 29, 2016 were priced about 6bp-9bp tighter than KDB, which was less than the 10bp people were expecting. Korea Development Bank (KDB) was seen as a key comparable as its bonds mature in September 2016, whereas IBK’s outstanding bonds mature in 2015 and were also not offered to professional US investors.

The deal was predominantly driven by Asian accounts, which bought 60% of the deal. Professional US investors took up 23% while European investors bought 17%. Funds bought 40%, banks 35%, insurance 11%, government agency 7%, retail 5% and others 2%. IBK is rated A1/A/A+.

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