Kepco jumps the Korean queue

The Korean utility surprises with a $250 million deal as Kookmin Bank and Korea Western Power launch roadshows.

Barclays Capital slipped into the Asian bond markets yesterday (Wednesday) with a rare FRN for the Korea Electricity Power Corporation (Kepco). The market had been expecting the group to return to the Yen markets for its re-financing requirements, with Daiwa said to have been unofficially mandated for a deal.

However, this plan fell by the wayside as pricing became less attractive and the group's existing five-year bond widened to 80bp over Yen-Libor equating to a mid 90bp level on a dollar Libor basis. By contrast pricing of the new Reg S five-year came at 99.80 on a coupon of 75bp over Libor and re-offer yield of 79bp over.

As would be expected for an FRN/loan, pricing came inside Kepco's existing credit curve. For example, the group has a September 2007 bond, which was being quoted at Asia's close around 127bp/123bp over Treasuries, equivalent to 83bp/79bp on an after swap basis.

The Baa2/A- rated group typically trades about 15bp wide of A3/A- rated KDB, but the gap has recently narrowed slightly and the development bank was being quoted yesterday at 122bp/119bp over Treasuries equivalent to 72bp/69bp over Libor. Its counterpart Kexim was being quoted at 127bp/123bp over Treasuries, or 83bp/79bp on a Libor basis.

Both banks saw spreads widen about 5bp yesterday in reaction to IBK's new $350 million five-year deal, which was priced at Asia's close Tuesday, but immediately widened at Asia's open Wednesday. Having been priced at 99.362% on a coupon of 4.375% to yield 4.519% or 130bp over Treasuries, the deal failed to stand up in secondary market trading and bankers believe this clearly highlights investor fatigue for policy bank paper at the five-year part of the curve.

Likewise, some specialists believe that had Kepco tried to do a fixed rate deal rather than an FRN it would have had to cede up to 8bp in pricing. At the end of the Asian trading day, about three-quarters of the deal had been syndicated, with Hyundai Securities acting as joint lead and Samsung Securities as co-manager. Fees total 20 cents to give an all-in around the 83bp level.

Typically most demand was said to have been coming from Tokyo, Singapore and Korea based banks, although some real money accounts in Asia and Europe were said to have participated as well.

The next test will be the market's reception to a rate fixed rate offering for Kookmin Bank mandated to ABN AMRO and HSBC. Roadshows for the $300 million five-year deal start today and will finish in Europe next Tuesday when the deal is set to price.

At the beginning of November, Kookmin completed a $300 million two-tranche loan flat to a previous loan by Kexim the month before. There are likely to be similar pricing targets for the bond deal despite the fact that Kookmin has a one notch lower rating from Standard & Poors in line with IBK, which is trading 8bp wider than Kexim. Kookmin's loan, which had a two-year tranche and three-year tranche, was completed at respective all-ins of 24bp and 34bp.

Further down the line, Goldman Sachs has the mandate for what is believed to be a jumbo $1 billion tier 1 capital deal, which currently sits fourth in the line of issuers hoping to tap the market before the end of the year. Hana Bank (mandated to JPMorgan, Barclays and Morgan Stanley) is said to be at the top of the queue followed by KEB (Merrill Lynch) and then Cho Hung (Salomon Smith Barney), whose deal is dependent on the government's final sell-down through the private equity market and therefore seems less likely to appear.

Finally, Korea Western Power should become the first genco spun off from Kepco to hit the intenational bond markets, with roadshows for a $150 million deal set to begin on Monday. ABN AMRO and Lehman will lead the deal, which has a BBB+ rating from Standard & Poor's.