Kexim wrestles with outsized demand

Korean policy bank returns to the dollar bond market backed by a supersized order book.

The Export Import Bank of Korea (Kexim) returned to the international bond markets on Monday with the kind of knock-out deal many Asian borrowers had probably consigned to the history books.

The quasi-sovereign credit managed to attract an order book topping $7.5 billion by the time its $1.75 billion two-tranche 144a deal closed during New York hours.

The Asian credit markets have not seen this kind of demand for a number of months and syndicate bankers described the transaction as one of the most impressive this year.

"Kexim has found just the right window," said one banker. "Credit markets are rallying, risk appetite is returning, investors are moving back down the curve and Korea has positive ratings momentum."

Buoyed by Standard & Poor's recent upgrade to AA- the bank set out with guidance for a long five-year bond at 110bp over Treasuries and 10-year bond at 130bp over. This was subsequently narrowed to between 95bp and 100bp for the five-year and between 110bp and 115bp for the 10-year.

Bankers said the 10-year tranche was by far the most popular of the two and attracted $5.5 billion in demand with a particularly strong showing from US investors who were allocated about 33% in total.

The remaining demand was split Asia 53% and EMEA 14%. Of the 300 accounts that participated, fund managers accounted for 42%, insurers 35%, banks 15% and other 8%.

The five-year tranche attracted about $2 billion with 14% going to the US, 53% to Asia and 33% to EMEA. There were 177 accounts in total, split fund managers 45%, insurers 10%, banks 37% and other 8%.

In June, when Kexim was most recently in the market, it attracted an order book of $2 billion for a $400 million tap of its 2026 bond and $600 million new 2020 bond.

The $750 million new long five-year has a May 2021 maturity and was priced at 99.969% with a coupon of 2.5% to yield 2.506% or 95bp over Treasuries. Pricing for the $1 billion 10-year was fixed at 99.746% on a coupon of 3.25% to yield 3.28% or 110bp over Treasuries.

The closest pricing benchmark for the May 2021 deal is Kexim's outstanding 2.625% December 2020 bond. This was trading on Monday on a G-spread of 70.9bp and Z-spread of 74.3bp, according to Bloomberg.

Bankers said the steep Treasury curve between five and six years entailed a 15bp step-up for a five-month maturity extension. This means the new deal has a new issue premium of 5bp to 10bp, although some syndicate bankers argued it was closer to zero, quoting comparable Treasury spreads for the December 2020 bond closer to 80bp over. 

The closest comparable for the 10-year is Kexim's 3.25% August 2025 bond. This was trading on Monday on a G-spread of 101.8bp and Z-spread of 93.1bp, according to Bloomberg. Bankers agreed that this tranche offered a 10bp new issue premium.

Korean issuers are not renowned for leaving any money on the table but bankers said the fairly generous pricing was a deliberate policy.

"Kexim had very clear goals for this transaction," one banker said. "It wanted to execute a benchmark deal that benefited from the recent rating upgrade. But it also wanted to create a good feeling in the market by making sure the offering was widely distributed and trades well when it breaks syndicate."

Full suite of double-A ratings

S&P upgraded the Republic of Korea and its related quasi-sovereign entities to AA- in September. This marked the end of a long, hard road for the country, which last hit a peak AA- rating in the mid 1990s shortly before the Asian financial crisis saw it slip to a low of B+.

The sovereign is now rated Aa3/AA-/AA- although Moody's still has its rating on positive outlook. 

In its assessment, S&P said the Korean economy has performed better than developed countries in recent years, leading to an improvement in its credit metrics, particularly where the next external liabilities of the banking sector are concerned. However, it expects this outperformance to diminish over the next five years, even though it expects Korea to outpace developed nations. 

Kexim's deal also benefited from postive underlying markets. On Monday, sales desks said a lack of primary market supply was creating a positive technical factor, which Kexim went on to fill. 

This also helped the secondary market performance of China Nuclear Power Corp, whose $500 million 10-year deal from last Thursday is now 6bp tighter than its 197.5bp launch spread. 

In a note to clients, Morgan Stanley said investment grade Asian credits finished about 3bp to 4bp tighter on Monday even though the day had initially looked like it might go the other way. It attributed this stronger-than-expected performance to dealers unwinding cash hedges.  

Joint global co-ordinators for Kexim's new deal are: ANZ, Barclays, Bank of America Merrill Lynch, BNP Paribas, Citi and SocGen

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