The Korean Electricity Power Corporation (Kepco) returned to the dollar bond market on Tuesday night with a $300 million deal that priced at the tight end of revised guidance. Like all recent transactions from Korea, the 30 put 10 offering attracted a huge order book, but suffered the impact of global market volatility during its first day trading on Wednesday, widening 5bp over the course of the Asian trading day.
Initially, Kepco had hoped to lengthen the duration of its funding profile with a 30-year bond and hoped to secure an all-in yield of up to 6%. However, since the transaction was mandated about three weeks ago, Treasury yields on the long bond have widened from 4.80% to 5.30% and Kepco was faced with an all-in yield closer to 6.5%.
This prompted the A3/A- rated credit to change course and structure a 30 put 10 deal instead. Under the lead of ABN AMRO, Deutsche Bank and Morgan Stanley, its deal was priced at 98.434% on a coupon of 5.125% to yield 5.329%. This equated to 93bp over 10-year Treasuries, or 49bp over Libor. Fees were 20bp.
Initially, the bond had been marketed at 95bp to 100bp over Treasuries before being tightened to 93bp to 95bp over.
At this level it priced through both KDB and Kexim on a Libor basis, although the put option makes comparisons slightly skewed since investors could assign it a worth of up to 10bp.
At the time of pricing, Kexim's recent 5.25% February 2014 bond was trading at 92bp over Treasuries, or 50bp over Libor. KDB's 5.75% September 2013 issue was trading at 87bp over Treasuries and 52bp over Libor.
Kepco itself has a 7.75% April 2013 bond that was bid at 80bp over Treasuries, or 60bp over swaps. Part of the reason why this bond lags the other proxy sovereigns is its high coupon and high bid price.
Since Kepco dropped its KDB guarantee in 2002, the group has traded at a 5bp to 10bp premium to KDB, but observers say the premium of all proxy sovereigns relative to KDB has been narrowing.
Kepco's new deal attracted a $3 billion order book at the final marketed range and about $2.2 billion of orders at the tight end of the range. Of the 188 accounts that placed orders, 128 got allocated.
By geography, the book split 39% Europe, 39% US and 22% Asia. Korea itself accounted for about 15%. Asian demand was the most price sensitive and fell away slightly as pricing came in at the tight end.
By investor type, funds took 44%, insurance companies 20%, banks 18%, hedge funds 12% and retail 6%.
In an interview with FinanceAsia published last week, Kepco funding head Myung-Whan Kim said the group has $1.2 billion foreign debt maturing this year and historically would only re-finance half of it. He went on to say the utility plans to return to the dollar market during the second half of the year for a further $300 million.
And while analysts caution that Kepco's debt levels remain relatively high, they have applauded the 52.5% government-owned group for attaining a more balanced mix between foreign currency and won-denominated debt.
In the absence of genco privatizations, Kepco still reported an overall debt load of $5 billion at the end of 2003.
Kim says the figure should drop to $4.5 billion by the end of 2004. He also says that dollars as a percentage of the total has dropped from 90% in 1997 to 50% today.