Kexim launches dollar bond as economy flounders

The Export-Import Bank of Korea leads the Korean charge into the primary debt market, as officials and economists fear the local economy will contract further.
Export-Import Bank of Korea (Kexim) is in the process of offering a five-year US dollar senior fixed-rate SEC-registered bond. The deal, which was launched yesterday, is being led by Citi, Deutsche Bank, HSBC, Merrill Lynch and RBS, and is expected to raise between $500 million and $1 billion, commensurate with its billing as a benchmark deal.

Bankers close to the deal point out that seasoned, but illiquid, Kexim dollar issues with tenors of four and seven years are bid at swaps plus 525bp and 575bp respectively. A base of 550bp plus a new issue concession of 25bp-125bp would thus set the price range for discussions with investors and market sources suggest a price in the range of 625bp-650bp is likely. Credit default swaps for the state-owned trade bank are currently trading about 350bp, while KoreaÆs sovereign CDS are around 270bp. Kexim, rated Aa3 by MoodyÆs, A by Standard & PoorÆs and A+ by Fitch, paid 138bp over mid-swaps for a Ç750 million ($1.16 billion) five-year deal in May 2008.

KoreaÆs finance minister Kang Man-soo said at the beginning of the year that the strategic state-run entities û Korea Development Bank and Kexim û planned to raise $2 billion in overseas markets this month in order to channel liquidity to local companies. KDB is expected to issue a three-year bond. Then, the government might look to tap the international markets itself, after having postponed a $1 billion sale slated for September last year when the credit crisis meant that lenders could insist on usurious rates.

Korean banks are under pressure to issue because they have been funding in dollars, and are more reliant on wholesale markets than banks in other Asian countries. Meanwhile, global banks have been withdrawing large amounts of short-term foreign debt, creating a shortage of dollars.

The Kexim deal will be the second major offshore issue from an Asian borrower this year, after the Philippines raised $1.5 billion through a 10-year bond deal last week. Secondary market spreads for Asian bonds have tightened to four-month lows following central bank interest rate cuts and the announcement of government spending plans. That is encouraging news for Asian bond issuers who delayed raising offshore debt in the second half of last year as investors grew increasingly risk averse.

G3 currency transactions in the region in 2008 amounted to $73.5 billion, which was down 22% from 2007 and the lowest annual volume since 2002, according to data-provider Dealogic. There were 34 Korean deals denominated in US dollars, euros or yen valued at $6.7 billion, compared with 42 issues worth $14.5 billion in 2007.

Outstanding debt capital market (DCM) volume is $1.5 trillion with an expected $146.6 billion will mature in 2009. Korean and Australian issuers account for 18% and 35% respectively of the total outstanding. The drop in G3 activity was to some extent counter-balanced by significant growth in local currency DCM issuance, which reached an all-time high of $201.9 billion in 2008 û although the increase was largely down to accelerated issuance by Chinese borrowers.

Economy calls for desperate measures
Korean borrowers are seeking access to international capital markets at a time when the domestic economy is struggling. On Friday, the Bank of Korea (BoK) cut interest rates for the fifth time in the past three months. It reduced its benchmark rate by a half point to a record low of 2.5%, as its governor, Lee Seong-tae, said that monetary policy should improve liquidity in financial markets and would be targeted to prevent a severe economic downturn in AsiaÆs fourth-largest economy. Interest rates have fallen a total of 2.75 percentage points since October. Decreasing inflationary pressure should allow the BoK to continue to loosen monetary policy and some economists predict that the benchmark rate will be lowered to 1.5% by June.

But the BoKÆs Lee pointed out that despite the rate cuts, banks and other lenders remain risk averse and are still reluctant to provide funds for Korean companies.

At the beginning of this month, finance minister Kang said that the economy would begin to recover in the second half of this year. Kang received widespread criticism last year from local academics for predicting early in LeeÆs presidency that Korea was facing its worst financial and economic crisis since 1998. His warnings now seem percipient as expectations of a slump during the next six months are commonplace.

ôThere is a very real danger that the Korean economy will actually contract this year,ö says Suktae Oh, economist at Citibank Korea. ôAll the key components û industrial production, exports, investment and consumer spending û are declining from the end of last year. Korea, with its export-dependent economy especially vulnerable to the world recession, has to face a severe slowdown despite all the monetary and fiscal stimulus measures. But we expect that the Korean economy will hit the bottom soon and start a gradual recovery in the second half of this year, thanks to the stabilisation of the global economy and the eventual impact of [government] stimulus packages,ö he says.

Last year the Kospi stockmarket index dived 41% and the won fell 26% against the US dollar despite efforts by the Korean authorities to support the economy and the financial system. Measures included boosting public spending, cutting interest rates and taxes and injecting cash into the banking system. This year, the government has already announced tax cuts worth W35 trillion ($26 billion) and extra spending of W16 trillion, and Kang has noted that the governmentÆs healthy fiscal position means that it can do more if necessary.

The risk that South KoreaÆs economy will slide into recession has increased after it contracted in the fourth quarter of 2008, against a backdrop of falling world demand for the countryÆs electronic goods, ships and cars. Ssangyong Motor, the South Korean carmaker, filed for court receivership on Friday after a collapse in demand for sports utility vehicles had caused a liquidity problem. Industrial production recorded its biggest ever drop in November, down 14.1% from a year earlier, and exports fell 17.4% in December, having fallen more than 15% in the previous month. Meanwhile, confidence among manufacturers has plunged.

Even President Lee Myung-bak has warned that this year's 3% GDP growth target could be missed û although Kang later reaffirmed the governmentÆs 3% forecast û and has held emergency meetings with government officials in an economic ôwar bunkerö at the Blue House. On January 2, the president said that Korea will run an ôeconomy-emergency governmentö to fight the worst economic crisis since its $57 billion bailout by the International Monetary Fund in December 1997. And last week, Lee warned that KoreaÆs economy could shrink during the first half of this year; the economy last contracted for two consecutive quarters in 1998.

A government official contacted by FinanceAsia confirms that the 3% growth target might have to be pared back, as the first quarter of this year is almost certain to post negative growth; exports are already down for the first 10 days of January. The BoK is likely to cut interest rates again during the next few months, while, he hopes, tax cuts and increased government spending should lead to a pick-up in domestic demand in the second half of the year. Meanwhile, Korean companies might benefit from contracts to assist in the infrastructure, energy savings and ôgreen growthö programmes announced by China in September.

But, the official says: ôWe are constantly examining what is a very uncertain situation. Korea is highly dependent on exports so our destiny to a large extent revolves around demand picking up within the major economic blocs û the US, Europe and Japan.ö
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