What many predicted would be an exceptionally difficult transaction to execute has, in the end, proven to be relatively straightforward. With joint leads Credit Suisse First Boston and HSBC able to keep secondary spreads relatively stable, the $300 million re-opening has not only been completed a couple of basis points inside where the two bought it last Friday, but has also satisfied KDB's strategic objectives.
The distribution pattern for the 5.25% November 2006 issue shows that KDB has made the jump to a new investment pool following its recent two notch upgrade to A3 by Standard & Poor's. Where the original $500 million issue was supported by investors chasing upside potential from its 182bp launch spread and a strong domestic bid, the new deal has been purchased by international buy and hold accounts.
Pricing Wednesday came at 99.250% on a re-offer yield of 5.438% equating to a Treasury spread of 95bp over. This meant that the deal was placed within rather than over a secondary market bid/offer spread of 98bp/94bp - a move necessitated by the level the two banks won the deal at last Friday, when the bond was quoted at 95bp/90bp over. Yet despite the fact that no other Asian re-opening has ever come through secondary market bid levels, the deal nevertheless closed just over two times subscribed with a final book of $620 million.
A total of 41 accounts participated, of which 27 were based in Asia, nine in Europe and five in the US. In percentage terms, Asia accounted for 76% of the total, with the US on 19% and Europe 5%. The Asian demand in turn was split 51% Singapore, 19% Japan, 13% China, 10% other and 7% Hong Kong.
By investor type, banks accounted for 52%, funds 43% and insurance companies 5%.
Observers say the most striking aspects of the distribution pattern were the absence of Korean investors (just a couple of orders) and the participation of the Chinese banks. "Mainland banks have a lot of sensitivity below the single-A threshold and so this is the first time they've really bought into the primary market," one banker notes. "In fact about 33% of the book comprised first time investors to KDB paper."
Consequently bankers comment that most accounts were not looking for a quick trading profit but a core holding for their credit portfolios. "There wasn't a lot of fluff in the order book hoping for a quick flip," the banker adds. "There've been quite a lot of redemptions of Korean quasi-sovereign paper this year. Most accounts wanted to get allocated and they were."
The main reason for the absence of Korean investors has been the closure of the won/dollar arbitrage, which proved such an effective backstop bid for Korean credit throughout the whole of 2001.
"This is a great deal," one participant concludes. "KDB has been able to complete a tactical re-opening on extremely aggressive terms, taking advantage of a good bid and smooth execution."
Fees totaled 20bp.