KDB brings second dollar benchmark of the year

Korean policy bank zips into market ahead of potential volatility surrounding next week's Federal Reserve meeting.

Korea Development Bank (KDB) jumped back into the G3 bond markets on Wednesday with a $750 million 144a deal that was timed to take advantage of what could turn out to be a short-lived market window. 

While renewed momentum across the Chinese stock markets has a created a positive backdrop, the looming US Federal Reserve policy meeting over the course of September 16 and 17 has the potential to send the emerging markets back into a tailspin even though few market participants believe it will raise rates. 

Over the past two days, the iTraxx Korea Index has come in 3bp to 65/70, a slightly less impressive performance than other Asian sovereigns. Nevertheless, it gave KDB the confidence to return to the international bond market for its first major benchmark deal since May. 

After building up an order book around the $2.1billion mark, the bank settled for a 10-year transaction at 99.857% on a 3.375% coupon, to yield 115bp over Treasuries.

A total of 167 accounts participated of which 73% came from Asia, 17% from the US and 10% from EMEA. By investor type insurers and pension funds took 56%, fund managers 21%, banks 11%, sovereign wealth funds and agencies 10% and private banks 2%.

Final pricing was 20bp inside initial guidance of 135bp over Treasuries, which was then revised to 115bp to 120bp over.

The nearest comparable was its outstanding 3.75% January 2024 bond, which was trading at 99bp over Treasuries on Wednesday. 

Fixed-income analysts said the deal priced a couple of basis points wide of fair value. This is fairly typical of the Aa3/A+/AA- rated credit, which always tries to set an aggressive benchmark no matter how accommodating market conditions are.

Kexim's outstanding 2.875% January 2025 bond was trading Wednesday at 105bp over Treasuries. With the curve worth about 3bp, this suggests that KDB has priced about 8bp wide of Kexim.

Its rival's most recent benchmark deal was a $1 billion deal this May, which has a December 2020 maturity. This was priced at 97.5bp over Treasuries. 

According to S&P Capital IQ data, the policy bank started to get its $4 billion 2015 funding programme into gear this May when it issued a $500 million five-year bond with a 2.25% coupon and spread of 72.5bp over Treasuries. 

This deal is currently trading around its issue price on a mid price of 99.195% to yield 90bp over Treasuries and also 90bp over on a Z-spread basis. 

This was followed in June by an Rmb1 billion ($156.8 million) three-year issue with a 3.55% coupon and a second Rmb1.2 billion three-year issue in August with a 4.1% coupon.

The bank also raised S$200 million ($141.5 million) in July again with a three-year maturity and a coupon of 2.05%. 

Credit metrics

According to its investor presentation, 60.2% of the group's 2014 funding was in dollars, followed by 13% in yen, 9.3% in euros and 6%. The remaining 11.5% was in other currencies.

By product type, 61% of its funding came from public deals, 33% from private placements and 6% from loans. 

In a recent research report, Moody's warned that a 10% fall in the Korean equity market would lower banks’ profitability especially policy banks.

The rating agency argued policy banks such as the KDB and the Export-Import Bank of Korea (Kexim) have significantly greater exposures to equities because of their long-standing tradition of initiating debt-to-equity swaps to restructure Korean companies.

On Wednesday, the Kospi traded up 2.96%, turning a negative into a positive year-to-date performance. It is now up 1.07% to 1,934.20.

KDB’s equity investments amounted to Won32 trillion ($26.85 billion), or 15% of its total assets in 2014, according to Moody’s.

Bank of America Merrill Lynch, BNP Paribas, Credit Agricole CIB, JP Morgan, KDB Asia, Standard Chartered Bank and UBS are the joint bookrunners of KDB’s latest bond sale.

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