KDB tops Kexim (surprise surprise)

KDB''s aggresive pricing strategy enables quasi-sovereign to price inside of Kexim.

In the second deal to come from a Korean quasi-sovereign in little over a week, Korea Development Bank (KDB) priced the country's third floating rate note deal from a policy bank early Wednesday morning (November 16). The A+/A/A3 (Fitch/S&P/Moody's) rated deal, led by Barclays, Credit Suisse First Boston and Morgan Stanley, was a $500 million Reg S transaction with a rare seven-year maturity.

The seven-year deal underlines the KDB's reputation as one of the region's most shrewd borrowers and was well timed to take advantage of growing investor appetite for FRNs.

Price at par on a coupon of 28bp over three-month Libor, the deal offers an attractive pick-up for investors who are said to have lost some of their appetite for floating rate notes at the moment. Fees were 15bp.

At this level, the deal priced 3.5bp through KDB's own secondary market curve. KDB's existing 2012 deal was quoted at 31.5bp over Libor at time of pricing. Furthermore, the deal prices inside of KDB's most recent offering a five-year deal with a September 2010 maturity. That was trading at 27bp over Libor.

Perhaps more importantly, the deal follows closely on the heals of fellow Korean policy bank, Kexim, which launched a record breaking five year FRN early last week. That deal was the first Korean issuer to break the 25bp barrier in the five-year sector, pricing at 24bp over Libor.

Heading into the deal, KDB was heavily committed to regaining top spot among the Korean quasi-sovereign's, and was looking to price at least 1bp through Kexim's latest offering. Until last year, Kexim had historically traded at a one or two basis point premium to KDB in the secondary market. This was then reversed in 2004.

Kexim's November 2010 FRN was quoted at around 25bp over yesterday. Bankers estimate the two-year curve to be worth 4bp, meaning that KDB's new deal has come 1bp inside of its friendly rival.

Following the recent volatility in the Treasuries market, investors have been looking to swap out of fixed rate deals and into floaters and typically look toward more defensive FRN structures when interest rates are likely to rise. In September, IBK was the first to seize on the opportunity that the European FRN bid presented, completing heavily oversubscribed five-year deal.

The distribution statistics reflect the different dynamics of an FRN, with a much larger banking component than normal and deeper penetration into Europe where there are a lot more floating rate buyers.

Indeed, European bids accounted for 50% of the total 54 accounts that made up the $1.15 billion book. Asia made up 30% of demand, while the remaining 20% was allocated to American-based accounts. In terms of investor type, banks bought up 65%, asset managers 25%, insurers 4%, central banks 3% and the remaining 2% went to unspecified accounts. Overall the deal attracted eight new accounts.