Korea Exchange Bank (KEB) priced an increased $300 million lower tier 2 deal on Friday (June 3) via joint leads Citigroup and HSBC. The deal was initially re-marketed as a $200 million issue, but upsized to the size KEB had always intended after attracting an order book of $1.3 billion.
The market's reception to the Baa3/BB+ rated issue shows that confidence is returning to the new issue market, although terms also show that a lot of the pricing power still lies with the investor base.
The 10 non-call five transaction was priced at 99.264% on a coupon of 5% to yield 5.169%. This equated to a spread of 151bp over Treasuries, or 110bp over mid-swaps. Fees were 30bp.
The two main pricing benchmarks are a $400 million 5.125% lower tier 2 deal for the National Agricultural Co-Operative Federation (NACF) due May 2015 (callable in 2010), plus a $200 million 4.625% upper tier 2 deal for Cho Hung Bank due November 2014 and callable in November 2009.
NACF has provided the most recent pricing benchmark since it only came to market nearly two weeks ago. On Friday, NACF was trading at 128bp over Treasuries, or 85bp over mid-swaps.
The pricing differential between the two can largely be explained by the fact that NACF is rated Baa1/BBB at the lower tier 2 level, some two notches higher than KEB from both agencies.
However, the key point is NACF's trading pattern over the past two weeks. When the deal was originally priced on May 22, it came at 145.3bp over Treasuries, or 100bp over mid-swaps. This means it has tightened about 15bp in the intervening period.
Bankers describe NACF as the sacrificial lamb that re-opened the market, built momentum into secondary trading and allowed investors to feel more confident again after starting to make money. The sovereign-owned group also had little choice since it needed to re-finance subordinated debt coming due in June.
So too KEB has been able to benefit from an improving US Treasury environment since NACF came to market and has consequently secured a lower coupon of 5% versus 5.125% for NACF. It fixed pricing over a US Treasury spot price of 3.875%
But bankers believe KEB still had to pay up to access the market and expect the deal to perform well during secondary market trading.
This is because it has come at a premium to Cho Hung bank, which has a more similar ratings profile to KEB than NACF. Cho Hung's has an upper tier 2 rating of Baa2/BB+ - one notch higher than KEB from Moody's.
Its November 2009 bond was quoted Friday at 125bp over Treasuries, or 80bp over Libor. This means KEB has priced at a 30bp differential to Cho Hung.
About 5bp of this premium can be accounted for by the yield curve, 10bp to 15bp for the one notch rating differential and 10bp to 15bp because of the need for a new issue premium.
When Cho Hung came to market late last October, it priced wider than current spreads, achieving a Treasury spread of 148.5bp for the upper tier 2 deal, equivalent to 108bp over Libor.
About 80 investors participated in KEB's new deal, of which 70% came from Asia, 15% from Europe and 15% from the US. By investor type, 49% were banks, 47% fund managers and 4% insurance/others.
The leads held pricing over from Thursday to Friday in order to try and attract more US investors. When the Lone Star controlled bank first marketed the deal in mid-April it spent a long time courting US investors.
The distribution splits show that it has not been entirely successful and bankers say this is because the pricing expectations of Asian and US investor base have been diverging wider again. "US investors are far more nervous at the moment," says one banker. "A lot of US funds looked at KEB from the perspective of a high yield deal and were demanding an even greater premium."
The bank is using proceeds to re-finance its double-digit high yielding deals of 2000, which are callable this year.