Korean electricity utility Kepco priced a $250 million exchangeable yesterday (Thursday) that will potentially monetize about half of its 43% stake in the country's second largest fixed line carrier, Powercomm. With ING and Good Morning Securities as lead managers, the deal was modelled on the Korean government's successful exchangeable of November 2001 - Korea Deposit Insurance Corporation (KDIC) into Cho Hung and Woori Banks.
Terms for the new deal comprise a five-year maturity and issue price of par with a coupon of 2% and redemption at 109.13%. There is a put option in year three at 102.74% to yield 2.88% or 48bp over Treasuries. The deal was marketed on a range of 40bp to 90bp.
In essence the transaction is a fixed income instrument until a Qualifying Public Offering (QPO) at which point it becomes an exchangeable. In the event of a QPO, the coupon steps down to 1% and the put price is adjusted upwards to maintain a yield of 48bp over Treasuries.
At this point, the exchange premium of 20% kicks in to the lower of the gross price per share of Powercomm shares/DRs, or the volume weighted average over a 10-day period. The deal will become exchangeable 15 days after the QPO closing date and has a three-year call subject to a 130% hurdle.
The deal was marketed on an exchange premium of 13% to 20%.
Trigger events for a QPO are an IPO of $200 million in size, or a freefloat equal or twice the aggregate principal amount of the notes outstanding. If the freefloat is less than $200 million, Kepco has an option within 15 business days of a public offering to redeem notes to the extent that the freefloat after redemption is twice the aggregate amount of the notes outstanding.
Terms for the A3/A- deal are very similar to KDIC's BBB+ rated offering. This was priced with a 2.5% coupon stepping down to 1.75%, an 18% exchange premium and redemption at 111.2779%. The deal had a four-year final maturity and a one-year shorter put option in year two at 105.239% to yield 2.81%.
Kepco's offering was marketed over four days and has had to contend with a weak underlying equity market following renewed problems at LG Card. However, bankers say there was a 65% hit rate from one-on-one meetings and having done their credit work, about 20% of the 50 strong investors put in orders for more than $25 million.
With total demand topping $1 billion, Kepco was able to achieve a fairly concentrated order book, with 54% of paper placed into Europe, 29% into Asia and 17% with offshore US funds.
Underlying assumptions for the bond are modelled on the basis of a 75bp credit spread, which is where three-year Kepco paper is quoted in the CDS market. This gives a bond floor of roughly 98.5% and theoretical value of 106.5%.
As one banker comments, "We do believe there is some option value as Powercomm has a good investment case based on growing broadband usage in Korea. It's also a very ingenious way for Kepco to raise cheap money as it is funding itself at 8bp over Libor."
Powercomm is currently part owned by Kepco and part owned by Dacom Corp, which holds 45.43% of the company's shares. The group paid Won819 billion ($678 million) for its stake in December 2002 with the aim of using Powercomm's fibre optic network to make end-to-end calls and compete with Korea Telecom.
To the nine months ending September 20, Powercomm saw net profit rise 9.4% to Won51.2 billion ($43.57 million)
