Korea Development Bank, or KDB, has returned to the debt markets only a week after selling SFr200 million ($194 million) of Swiss franc-denominated four-year bonds to Switzerland-based investors. This time it was relying on its home base of Asian accounts to pull a $900 million five-and-a-half year deal over the line.
The senior unsecured and SEC-registered notes pay a fixed-rate coupon of 3.25%, which is said to be the lowest coupon ever from a Korean bank with a maturity over five years. They were re-offered at 99.98 to yield 3.254%. This was equivalent to a spread of 185bp over the five-year US Treasury yield. The maturity date was set to March 6, 2016 and the notes were rated A1 by Moody’s, A by Standard and Poor’s and A+ by Fitch.
KDB last accessed the US dollar market in February when it sold a $750 million five-and-a-half year senior unsecured bond. That deal, together with Export-Import Bank of Korea’s 2015 bonds, proved to be the most liquid benchmark for investors.
When KDB announced its second dollar-denominated deal for the year on Wednesday, the existing 2015 notes were trading at 173bp over the five-year Treasury yield. Kexim was trading at Treasuries plus 177bp.
Typically, what would happen in this end-of-summer lull period is the notes would be issued with a premium to compensate accounts for the lack of liquidity in the market. However, one source close to the trade said this did not happen on this occasion.
“Over the course of the summer there has not been a lot of Korean supply but Korean spreads have gradually been tightening,” observed one banker. Meanwhile, the demand for the bonds was healthy and investors were both confident in and very familiar with the A-rated credit. This was what ultimately drove the notes to print well inside guidance and through the existing KDB curve, without a new issue premium.
Taking into account a seven-month extension from the existing KDB bonds (which mature August 10, 2015), one source familiar with the deal calculated that the curve from five to the five-and-a-half year mark was worth 14bp. Therefore, a new five-and-a-half year deal could comfortably price at 187bp -- that is 173bp plus the 14bp extension.
At launch the guidance was, however, set around 195bp. As one banker explained, “it is important to give comfort to the market that there is the flexibility to print a trade that could be bigger in size”, hence the generous leeway from the 187bp benchmark.
By the end of Asian trading on Wednesday it was clear that there was healthy appetite for the notes and the guidance was revised to between 185bp and 190bp. One source noted that despite there being enough appetite to upsize the deal to $1 billion, the borrower felt comfortable to keep the size at $900 million as this was all that was needed to meet its internal funding requirements.
In the end, the new KDB 2016s priced late Thursday Hong Kong time at a spread of 185bp, which was at the very tight end of guidance and through the existing secondary curve.
The performance of the bonds pulled in the sector curve for Korean policy banks by 5bp to 10bp in the secondary market during yesterday's session. By late afternoon the new KDB 2016s had tightened to 180bp, while the KDB 2015s were trading at 170bp.
The bookrunners (Barclays Capital, Citi, Credit Agricole CIB, Deutsche Bank, J.P. Morgan and KDB Asia) took orders from 270 accounts to secure a final order book of $3.8 billion, or 4.2 times the $900 million deal size.
As is typical with Korean policy banks, the biggest investor group to buy the bonds were fund managers, who took half of the sale. Banks bought 20%, central banks and agencies shared 15%, private banks took 10% and insurance houses 5%.
Asia-based investors received 43% of the allocation, US 38% and Europe received 19% of the bonds.
The notes were issued as a part of KDB’s $4 billion US shelf programme, which was last updated on August 27 by the US Securities and Exchange Commission. Amendments have also been made to the KDB Act, which defines KDB's relationship with the government under Korean law. The new writing says that any debt sold by KDB in the future is to be issued with an explicit government guarantee. This was previously not the case.
Analysts of the Korean market expect that the amendments will have no affect on the demand for bonds. However it will affect the structure of future notes, as previously all quasi-sovereign notes were issued with a change-of-support clause protecting investors from any divestment of KDB shares or moves by the government towards a privatisation of the bank.
The quiet in the new issue debt markets is expected to end as we move into September. The China property sector is expected to pick-up again with Renhe ending its roadshow yesterday and Powerlong Property Holdings announcing a non-deal roadshow for next week.
The current expectation is that Renhe won't be a strong trade after its intention to price two weeks ago was called off. Since then, China property credits have struggled to perform.
“There are a lot of names out there and the technical aspects of the trade are looking tough,” explained one banker. “Pricing now, against the current market backdrop will only drive the China property curve wider.”
Bank of America Merrill Lynch, Bank of China International and UBS are said to be managing the sale for Renhe, while HSBC and Royal Bank of Scotland have been appointed by Powerlong Property Holdings to arrange its debut in the US dollar markets. With a B+ rating by Standard and Poor’s and a provisional B1 rating issued by Moody’s, Powerlong is expected to follow its property peer group and issue a high-yield security.