Export-Import Bank of Korea (Kexim) continues to make its mark as an imaginative and opportunistic borrower. The Korean state-owned policy bank has an impressive recent history of taking advantage of localised demand for high-quality issuers or of open swap windows. Last week, it demonstrated that skill and agility once again.
On June 4, Kexim became the first Korean entity to tap the Taiwanese bond markets with an issue targeted at retail investors, launching a US dollar-denominated Formosa bond with a 2.65% fixed-rate semi-annual coupon. Formosa bonds refer to foreign currency-denominated bonds sold by a foreign institution in the Taiwan market.
The deal has a minimum size of $270 million, having been underwritten by the lead banks, and a greenshoe that will cap the deal at a maximum of $500 million. A greenshoe is an over-allotment option that gives underwriters the right to sell additional bonds if demand exceeds the original amount offered.
"This is still early days, but at the moment a $270 million deal is probably the biggest transaction in the Formosa market," said one banker.
The deal does not follow the typical process usually associated with G3 bond issuance in Asia. Taiwan's Formosa bond market allows borrowers to issue the foreign currency bonds to both domestic institutions and retail investors. As a result, Formosa bonds will typically have a longer subscription period in order to attract a strong retail investor base. In this case the primary subscription period is open from June 7 to June 22.
With a 3.5-year tenor, the maturity date has been set at December 23, 2013. The bonds will be listed on Taiwan's over-the-counter GreTai Securities market on June 23.
In a press release put out earlier this week, Jin-Kyun Lee, director of the international finance department at Kexim, stated: "Taiwan offers [Kexim] an attractive source of US dollar financing and a way to broaden our Asian investor base."
It is not expected that Kexim will look to swap the proceeds of the bond back into Korean won or Taiwan dollars. "The main reason for this deal is funding diversification," said a source. "There is a huge base of retail deposits in Taiwan that Kexim wants to get access to."
With a strategy to diversify its funding sources, Kexim is one of the more sophisticated and experienced borrowers in the Asian region and is akin to taking advantage of offshore markets to meet its funding requirements.
In October last year, Kexim priced a SFr500 million three-year bond, which was the largest deal issued in Swiss francs in Asia. In March 2008, the borrower tapped the Malaysian market by pricing a M$1 billion 10-year bond.
Earlier this year, it successfully priced a 5.5-year $1 billion deal against what was quite a volatile market backdrop. The deal attracted a $2.7 billion order book from 230 accounts. As of the close of the Asian session yesterday, the bonds were trading 192.5bp over the five-year US Treasury yield, which is 2.5bp tighter that where the notes initially printed (195bp).
This time around, Kexim identified an opportunity to access the Taiwan market given that the public dollar markets are relatively shut at the moment. From a borrower's perspective, the Formosa market presents a set of different dynamics that appeal to seasoned borrowers such as Kexim.
"Kexim could get funding at a tighter spread in the Formosa market than it could get in the G3 markets," said one banker. "The absolute rate and the absolute coupon are more important than relative mid-swap spreads for retail," he added.
The deal is being arranged by Deutsche Bank and the majority of the deal is underwritten by Mega Bank and Bank of Taiwan. This is the third deal brought by Deutsche Bank in the Formosa market, following self-led deals for the German bank in 2006 ($250 million) and 2009 ($260 million).
The bonds will be distributed to investors by Mega Bank, Bank of Taiwan, Chang Hwa Bank, First Commercial Bank, Taiwan Cooperation Bank and Deutsche Bank's Taipei branch.