The Export Import Bank of Korea (Kexim) returned to the bond markets on Tuesday with an opportunistic and successful trade in euros.
Under the lead management of ABN AMRO and Deutsche Bank, the A3/A-/A (Fitch) rated bank raised Eu300 million ($382 million) from a five-year deal. Pricing came at 99.952% on a coupon of 35bp over euribor to yield 36bp over. Fees were 12bp.
Like KDB two weeks before it, Kexim saw that an FRN structure with a five-year maturity currently represents the sweet spot of the market. An FRN makes sense at a time when investors increasingly looking for more defensive instruments in a 'rising interest rate environment,' while the five-year part of the curve is now attracting buying interest as it plays catch up with the long end of the curve.
However Kexim chose a different currency to KDB and opted to issue in euros for the first time. The strategy appeared to pay off after the transaction attracted an order book of over Eu1 billion, enabling pricing inside the bank's dollar curve.
As funding head SU Hong explains, "Because our remit is to support Korea's export industries, we have end client demand for euros and have been thinking about the currency for some time. But it was only at the time of the IMF meeting in September that we really started to look at a deal in earnest and collected a lot of feedback from our relationship banks.
"Then when we saw how successful the China euro trade was last week, we decided we had a perfect opportunity to take advantage of the momentum it generated with a deal of our own."
Bankers also argue that Kexim benefited from the same dynamics that drove China's sovereign deal. "European investors have certain yield targets and they need to find new credits to hit them," says one syndicate head. "They face concentration issues and are constantly on the look-out for interesting new credits to diversify their portfolios."
In this instance, Kexim offered a lot of value to similarly rated euro credits that have recently tapped the market. For example, two five-year FRN's were printed in Europe last week.
Portuguese bank, Caixa Economica Montepio Geral, raised five-year money at 26bp over euribor. This was 10bp inside of Kexim despite the fact that the latter has a one notch higher rating from Fitch - A3/A versus A3/A- for Caixa.
Likewise Australian bank Suncorp-Metway, raised five-year money at an even tighter 17bp over euribor. It has a one notch higher rating from S&P and Moody's - A2/A/A versus A3/A-/A.
This relative value pricing dynamic meant Kexim was able to push its pricing expectations relative to its own dollar curve. At the time of pricing, its recent August 2009 issue was trading at 39bp to 44bp over Libor depending on which bank is quoting the price. On a like-for-like basis, 36bp over euribor equates to 36.5bp over Libor, which puts the new deal 2.5bp to 7.5bp inside its own dollar curve.
Arch rival KDB was being quoted at 40bp to 42bp over for its August 2009 bond, which means Kexim has priced inside this benchmark too.
Part of its success can be attributed to a tightening of US swap spreads, which have pushed out the Libor levels of its outstanding bonds over the past few days, whereas Treasury spreads have remained fairly flat. Last Friday, for example, some banks were quoting Kexim's August 2009 bond in the mid 30bp level over Libor.
Either way, Kexim is the first bank since the financial crisis to price inside over 40bp over Libor for a five-year maturity. Hong says he is exceptionally pleased with the transaction.
"Obviously dollars are very important to us," he concludes, "but what I've learnt is that euros are very important too. This is a market where the volume of issuance is increasing all the time and the investor base is very solid. Price wise it has not put us at any disadvantage. In fact we've priced through our dollar curve."
Bankers report the participation of 68 investors of which 53% came from Asia and 47% from Europe. This tilt in favour of Asia can be explained by the fact that the order book was closed one day early to catch a positive market tone ahead of European roadshows.
The Asia book had a further split of Singapore 26%, Japan 12%, Hong Kong/China 9% and Korea 3%. Europe, meanwhile, split UK 17% and Continental Europe 30% including accounts from Cypru, France, Germany, Israel, Luxembourg, Netherlands and Spain.
By investor type, banks took 47%, funds 30%, central banks 20%, corporates 2% and retail 1%.