Kexim breaks another record

Quasi sovereign brings KoreaÆs first offshore debt deal of 2006.
The Export Import Bank of Korea (Kexim) priced a $1 billion-equivalent dual tranche bond issue early this morning (February 8) under the lead management of Barclays, Citigroup, Deutsche Bank and Morgan Stanley.

The A/A3/A+ (Fitch) rated deal has been split into a $600 million five-year, fixed-rate offering and an Eu325 million seven-year FRN tranche.

The dollar denominated tranche was priced at 99.496% on a coupon of 5.125% to yield 5.241%, or 71.5bp over Treasuries. This equates to 20bp over mid swaps, or 19bp over Libor.

Pricing at this level comes through KeximÆs own secondary curve. KeximÆs March 4.625% 2010 deal was quoted at a bid/ offer spread of 21bp to 18bp over Libor at the time of pricing, giving the bank a 1bp pick up over its own one-year curve.

Also, in early November the quasi-sovereign priced a $500 million five-year FRN, which has a 2010 maturity. That deal was priced at 24bp over Libor, and was trading at around 22bp over yesterday. This means Kexim picks up approximately 3bp over its own three-month curve.

The Euro FRN priced at par to yield 24bp over Euribor. This is the first time Kexim has gone to market with a seven-year maturity. Kexim chose to issue a seven-year deal to address its new asset life profile. As Executive Director SU Hong explains, ôour new asset life has a period of seven to eight years and we needed to issue at this maturity to adequately manage our asset liabilities.ö

Additionally, European accounts have recently had a strong appetite for seven-year maturities in the FRN space.

The success of the deal once again highlights just how savvy Hong is when reading the international debt markets. Bankers believe that having opted to wait until the secondary markets settled down after a bevy of earnings warnings from the US late last month, Kexim picked the right time to issue the regionÆs first investment grade deal into a market flush with liquidity with enormous demand for Asian high grade issuance.

Both tranches were well covered; the book for the dollar tranche closed at just over $1 billion with over 70 accounts and the Euro tranche closed with 45 accounts with a total book size just over Eu700 million.

In terms of distribution, the dollar tranche was sold 46% to US accounts, 44% Europe, and 10% to Asia. Banks bought the majority of the paper with 42% allocated. Fund managers bought up 38%, insurers 14% and the remaining 6% went to private banks and pension funds.

The Euro deal was broken down 71% Europe, 28% Asia and 1% US. Banks again were the biggest buyer of the deal at 78%, followed by fund managers on 11%, with retail investors and central banks buying up the remaining 11%.

Proceeds from the sale will be used to refinance debt. Kexim has $500 million and HK$350 million in debt maturing later this month. In total, the quasi-sovereign has approximately $1.5 billion-equivalent coming due in 2006.

Based on KeximÆs typical annual financing requirements and its upcoming redemption schedule, bankers estimate the bank will seek to raise upwards of $3 billion in total issuance from the debt capital markets this year.

Kexim is the first Korean issuer to tap the international debt markets in 2006. However bankers are expecting Korea to retain its position as Asia's most active market, with expectations of up to $20 billion worth of issuance.

Hong was particularly pleased with the outcome of the deal, and believes its success will provide a benchmark for other Korean issuers expected to head into the international market later this year. ôIt's a very important deal for us and for the market,ö he says. ôWe priced a deal at the 20bp level for the first time and in doing so we have paved a golden road for the other Korean financial institutions to follow.ö

Kexim carries the same rating from all three major international rating agencies as the Republic of Korea because of its quasi sovereign status and strong governmental support. Kexim is effectively viewed as default government risk.

However, in its most recent ratings report, S&P also stated that, ôthe ratings on Kexim are constrained by its low profitability. As a state-owned bank with a public policy mandate, Kexim is not primarily concerned with profit maximization and its net interest margin has been historically low. According to data provided by Kexim, its margin declined in 2004 to 0.89%, from 1.69% in 2003. The margins are unlikely to improve this year as interest rates rises globally.ö

Last year both S&P and Fitch upgraded KeximÆs debt rating in light of the bank's increased ability to meet its financial objectives. Additionally, the respective upgrades were a reflection of the governmentÆs ongoing efforts to stabilize geopolitical risk resulting from North Korea.

Hong is also hopeful of further ratings increase. ôKorea is the only country that has world-class shipbuilding, IT, semi-conductor, steel and automotive sectors and is still rated single-A. We should be a double-A country,ö he once more re-iterates.
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