KDB bond rides the back of latest Fed cut

The Korean policy bank has secured the lowest coupon in the Korean credit universe.

In a pattern becoming increasingly familiar with international bond offerings from Asia in recent weeks, the Korean Development Bank has managed to achieve the lowest outstanding coupon for a borrower of its nationality. Taking full advantage of the10 interest rate cuts seen so far this year and Treasury yields at 40 year lows, the Baa2/BBB-rated bank priced a $500 million five-year SEC-registered global bond offering in New York last night (Thursday) with a semi-annual coupon of 5.25%.

Launched at a fixed price re-offer of 99.415%, the bond yields 5.385% or 182bp over Treasuries. With Barclays and Salomon Smith Barney as joint global co-ordinators, there were an additional 12 co-managers, taking combined fees of 10% for an all pot deal. They number ABN AMRO, BNP, Bear Stearns, Credit Suisse First Boston, Daewoo Securities, Deutsche Bank, Fleet Securities, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and Mizhuo Securities.

Prior to this latest transaction, Kepco and Kexim shared the honours for hosting the lowest coupon among Korean fixed rate borrowers. Both have 6.375% dollar bonds outstanding, with the former's due 2003 and the latter's 2006.

Observers believe that KDB is likely to have been satisfied with the result of its first dollar deal since April 1999, even though pricing was about 20bp wide of internal expectations. As one banker puts it, "KDB has also been able to successfully balance a desire to achieve genuine international distribution with the kind of pricing that would normally only be possible by relying on a strong domestic bid."

Doing so was made all the more difficult by competing supply from higher-rated benchmark corporate credits in the US such as Ford Motor, which is trading almost 100bp wider. To ensure a strong book the leads, therefore, deliberately set out with pricing guidance slightly wider than market expectations, with the aim of generating the kind of momentum that could be used to lever in the pricing demands of US investors.

Bankers report a total of just under 100 investors in the order book, with a geographical split that saw 40% of paper placed in Asia, 35% in the US and 25% in Europe. Books were said to have closed two-and-a-half times oversubscribed, with about 25% of US investors new to the credit and a couple of orders topping the $100 million mark.

Few investors were said to have paid much attention to KDB's credit fundamentals on a stand-alone basis since the sovereign provides an unconditional liquidity guarantee. Although the bank has the lowest financial strength rating of any Korean bank (E), it has always been viewed as a sovereign play.

The current 2006 deal is said to have been priced at a roughly 12bp pick-up to KDB's outstanding 2006 deal and a 15bp pick-up to the sovereign on a duration-adjusted basis. This is roughly in line with the pricing KDB achieved in 1999, when its 7.125% April 2006 deal was priced at a 22bp premium to the Republic.

The outstanding 2006 deal was trading on a bid/offer spread of 170bp/165bp at the time of pricing yesterday, some 10bp wider than it had been earlier in the week. The Republic's benchmark 2008 bond, by contrast, was bid at 119bp over Treasuries.

However, bankers point out that the 2008 bond is traded over a 10-year treasury and that on a Libor basis equates to about 95bp over, which when swapped back to fixed rate would price a new sovereign five year at about 165bp over Treasuries. Some also conclude that PCCW-HKT also provides a telling comparison. Both credits share the same rating, but whereas KDB came at 182bp, PCCW came one day earlier some 102bp wider on a duration-adjusted basis.

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