KDB poised to re-open 2006 bond

The Korean policy bank aims to make a tap of its recent international dollar bond most likely early next week.

Having originally planned to put bids out to competitive tender today (Friday), KDB has decided to mitigate the risk of the market moving over the weekend by holding beauty parades early next week instead.

Six banks are said to have been invited to submit bids for what was originally slated to be a $250 million tap, but may be increased to $500 million subject to demand. The six comprise Barclays Capital, Credit Suisse First Boston, Goldman Sachs, HSBC, JPMorgan and Salomon Smith Barney.

Competition to secure the deal is likely to be intense and given KDB's reputation as a lowly fee payer, it will only take a very small movement in spreads to make the deal unprofitable for the eventual winner. Sensibly, however, the bank appears to have opted to complete documentation and ready the deal so that it can be launched almost as soon as the mandate is awarded

In this way, it should avoid the difficulties encountered by the Republic of the Philippines last July when it put a 10-year dollar global out to tender and the mandate was awarded to CSFB on highly aggressive pricing allegedly pitched flat to the sovereign's outstanding nine-year bond. Because documentation was not ready, both CSFB and the borrower then watched as spreads backed up 50bp in the space of a few days on the back of emerging market volatility and the mandated pricing became meaningless. The deal was later withdrawn.

Where KDB is concerned, specialists say that it makes a great deal of sense to increase the liquidity of the bank's outstanding $500 million line, which also holds the record for being the lowest outstanding fixed rate coupon for a Korean borrowing. Launched in early November under the joint lead of Barclays and Salomon Smith Barney, $500 million was raised from a November 2006 transaction.

Pricing came at 99.415% on a coupon of 5.25% to yield 5.385% or 182bp over Treasuries. About 100 accounts were said to have participated, with a distribution split which saw 40% placed in Asia, 35% in the US and 25% in Europe.

At Asia's close Thursday, the deal was being quoted on a bid/offer spread of 98.967%/99.227% to yield 5.5% bid or 91bp over Treasuries. As rumours that the bank is preparing to re-open the deal have grown over the past couple of days, the deal is said to have widened about 10bp, but had previously tightened by 5bp after Standard & Poor's initiated a surprise two notch sovereign upgrade from Baa2 to A3 last week.

KDB will, therefore, almost certainly become the first Korean entity to take advantage of the upgrade which is now said to be fully reflected in current trading levels. In a research report published this week, however, Salomon commented that it expects "liquidity to drive the spreads marginally tighter owing to ample domestic liquidity."

And although KDB is regarded as sovereign proxy, the new deal is also likely to be aided by an improvement in the bank's stand-alone credit fundamentals. After recording W1.4 trillion in net losses for the 2000 Financial Year, the bank recently reported a W109 billion net profit for 2001. Its capital adequacy ratios have also been lifted from 11.4% to 16.7% (September figures), primarily after the government injected W3.05 trillion in the form of Kepco shares.

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