KEB sells $200 million 'Basel II' bond

The issue is expected to be South Korea’s last Basel II-compliant bond as the nation shifts towards adopting Basel III rules in December.
KEB's bond has an initial price guidance of 235bp above Treasuries, according to a source.
KEB's bond has an initial price guidance of 235bp above Treasuries, according to a source.

Korea Exchange Bank (KEB) sold a $200 million 10-year Basel II-compliant Tier 2 subordinated note on Thursday as market conditions improved after the 16-day US government shutdown ended.

The bond – with a coupon of 4.625% - is expected to be South Korea’s last Basel II-compliant bond as the nation shifts towards adopting Basel III rules in December.

It priced 30bp tighter than its initial price guidance of 235bp above Treasuries, indicating strong demand for the old-style instrument that is being phased out, according to a source. The nearest comparables for KEB’s note was Woori Bank’s 2021s that had a G-spread of 212bp over Treasuries.

“We saw a good window post-resolution in the US and KEB’s bond printed through the Woori bank’s curve,” said a source close to the deal.

KEB’s paper achieved a sizable order book of $2.4 billion from 136 accounts. Asset managers and fund managers subscribed to the bulk of it - 68% - followed by insurance companies with 16%, financial institutions with 12% and private banks with 4%. Asia took 92% of the bond while the rest went to Europe, according to a stats sheet.

The financial institution’s next bank capital bond will most likely be a Basel III-compliant Tier 2 note as Korean banks look to shore up capital to meet upcoming Basel III regulations.

“They are one of the lucky few to issue globally in the old format and did not need to include any new nuances to make it Basel III-compliant,” added the source. “Basel III happens in Korea this December. I doubt there will be any more old-style issuance especially in dollar format.”

Unlike Basel III instruments, the old-style does not have any loss absorption features attached to it, meaning there will be no chances of a write-down in the event the seller defaults.

The Financial Services Commission (FSC), South Korea’s financial regulator, said in May that it will implement the international Basel III capital rules from December. The deadline was postponed from January as many Basel Committee members failed to fix the launch dates last year.

Under the Basel III framework, banks will be required to keep their common equity capital ratio above 4.5%, the Tier 1 capital ratio above 6% and the capital adequacy ratio above 8% by 2019.

In addition to KEB’s Basel II-compliant bond, Haitong International Finance - an indirect wholly owned subsidiary of China-based Haitong Securities - has plans to issue a US dollar-denominated Reg credit-enhanced bond, hoping to ride on improved conditions.

Syndicate bankers note that Asia’s bond market looks set to be one of the biggest winners from Wednesday night’s deal to end the US fiscal impasse. Rates are expected to stay low for the moment and any reduction of quantitative easing is now likely to be pushed back to 2014.

The proposed issuance will come with an irrevocable standby letter of credit from Bank of China’s Singapore branch and a keepwell deed to be provided by Haitong Securities, according to a term sheet.

The issuer has hired Bank of China, Deutsche Bank and Haitong International to arrange a series of fixed-income investor meetings in Hong Kong, Singapore and London from Friday onwards.

Moody’s has assigned a provisional A1 rating to the expected five-year notes.

US Treasury yields rallied on Wednesday as the US Senate discussed a deal to reopen the government and avoid a potentially devastating default. The 10-year Treasury yield sank to 2.67% Wednesday, down from 2.74% on Tuesday.

Bank of America Merrill Lynch and Barclays are the joint bookrunners and lead managers of the Baa1/BBB+ rated KEB deal. KEB Asia Finance is the joint lead manager.

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