The Korean policy bank underlined its market expertise and adeptness late last Thursday with a $500 million re-opening of its 2007 and 2012 bonds. KDB's head of international funding, Bong-Sik Choi, says the bank is hoping to raise double its normal offshore fundraising quota during 2003 and therefore knew it would be crucial to set the right tone with its first deal. It would have also been conscious of a pressing need to re-affirm its status as Korea's most consistent and smartest proxy sovereign borrower in a year which will see a $3 billion sovereign transaction, currently expected towards the end of the first quarter.
Choi says that additional KDB supply in 2003 has been driven by the bank's desire to re-pay multilateral loans dating back to the Asian crisis. "This year our strategy should be pretty similar to last year," he says. "The main difference is that our funding requirement will be double because we want to re-pay a $2 billion ADB loan taken out during the height of the financial crisis in 1998. It doesn't fall due till 2004, but we feel now's the right time to repay it as we have a single A rating again and can get good pricing. Last year pricing wasn't quite there."
During 2002, KDB raised roughly $2 billion from the international markets and as Choi adds, "Last year we aimed to tap the major currency markets and look for opportunistic funding. However, most of the funding took place during second half of the year because we were waiting to take advantage of ratings upgrade momentum."
This resulted in the bank completing just two transactions during the first half of the year – a $300 million re-opening of its November 2006 bond via Credit Suisse First Boston and HSBC, plus a $100 million equivalent Hong Kong dollar trade. It kicked off the second half with a $300 million equivalent Samurai bond in July, followed by a $400 million syndicated loan in September and then a $750 million five and 10 year global in late November via Barclays, CSFB and JPMorgan. Choi also says the banks raised nearly $300 million via a series of smaller trades off its MTN programme.
By waiting under Korea was upgraded to A3/A- the bank was not only able to take advantage of a tighter spread environment, but also a lower interest rate environment that bought down its absolute cost of funding on a pre-swap basis. Like most Korean borrowers, however, it has a reputation for being an absolute stickler on pricing and Choi appears to find this a little irritating.
"One thing investors always say about KDB is that we are very aggressive about pricing. And yes of course we are price sensitive. We have to be. We are the market leader and have to set a good benchmark for all the other Korean corporates and financial institutions. But we also value our relationship with investors. Last year, for example, not many foreign borrowers were tapping the Samurai market because Yen funding was not as attractive as dollars. Yet we decided to complete an issue because we wanted to maintain a good relationship with Japanese investors."
Tight pricing was very much to the fore with the latest transaction led by ABN AMRO, Deutsche Bank and Morgan Stanley. Replicating the success of its re-opening last March, the new deal was also priced through the bid on both the $350 million five-year and $150 million 10-year tranches. Pricing of the re-opened 4.25% November 2007 bond came at 100.347 to yield 41.68% or 127bp over Treasuries. At the time of pricing the five-year was trading at 129bp/126bp. The 5.5% November 2012 bond was re-opened at 101.955% to yield 5.241% or 129bp over Treasuries. This bond had been quoted in the secondary market at 130bp/127bp.
Unlike March 2002, all concerned maintain that the new deal was won on a market clearing rather than bought books basis. At the beginning of the week shortly after the deal was mandated, the five-year had been trading 3bp wider and the 10-year about 6bp wider. By the time the deal was publicly announced on Tuesday, the leads had already been able to slowly grind secondary spreads in and went out with indicative range of 130bp to 126bp for the five-year and 131bp to 127bp for the 10-year.
In terms of distribution, 60 investors participated in the five-year and 35 in the 10-year. The leads were able to build an $800 million book and unusually, only about 25% of orders came from investors who had participated in the original deal last November. A number of accounts were said to have been alienated by geopolitical tensions with North Korea and an even larger number by lack of relative value considerations.
However, in what must rank as one of the largest percentage participation rates for a non euro-denominated deal, the five-year book was dominated by European accounts. Half the deal was placed in Europe, with 25% going to both the US and Asia. Where the 10- year was concerned, bankers report that 38% went to Asia, 37% to the US and 27% to Europe. By investor type, 40% of the five-year book went to funds and 60% to banks, while the 10-year was split: 27% insurance funds; 35% funds; and 40% banks.
Choi says that KDB should come to the market at fairly regular intervals during 2003, but will also make sure it is always ready to take advantage of any opportunistic funding opportunities that may come along. He says that one area of interest lies in tapping the euro-denominated market, as he believes the currency will continue to strengthen against the dollar.
KDB's astuteness in taking advantage of January's historically plentiful liquidity will have done much to avert investor concerns about the North Korean issue. Like many of his fellow countrymen, Choi finds the situation puzzling and overblown. "Over the past week I've been surprised that the North Korean situation has dominated the news headlines so much in the foreign press" he comments. "I'm sure it will get resolved diplomatically. There's been constant dialogue between North and South recently as well as with our key allies."
Instead KDB and the government are turning their hopes to the possibility that Korea will be shortly upgraded again by the ratings agencies. Moodys was in town last week and Choi concludes,"I'm confident Korea's rating will get upgraded soon. The Republic has undergone significant economic reform over the past few years. The incoming new administration is focused on enhancing Korea's global competitiveness to continue reform and economic growth."