Kexim's bonds tighten in the secondary market

The Korean issuer sends out the message that borrowers can raise a substantial amount at a reasonable price.
Export-Import Bank of Korea (Kexim) priced an impressive $1.5 billion deal yesterday, closing the largest offering ever by the bank, and the largest single tranche bond from Korea since the governmentÆs $3 billion rescue bond in 1998.

The five-year transaction, rated Aa3/A, priced at 116bp over Treasuries û which at the time of launch equalled 50bp over mid-swaps, but by the time it priced equalled 51.5bp over midswaps, as swap spreads tightened. The deal closed with a coupon of 5.5%. In terms of investor-split, 35% of the bonds sold to funds, 37% to banks, and 28% to central banks and insurance companies. Twenty per cent sold to Europe, 30% to Asia and 50% to the US. A total of 170 investors participated in the deal, which garnered demand of $4 billion.

Having issued a guidance of 50bp to 55bp over mid-swaps, the transaction priced at the tight end of guidance. The bonds tightened yesterday on the secondary market to a bid/offer of 115.5 to 115 over Treasuries.

Leads initially sounded out investors prior to formally announcing the bond, a move criticised by rival bankers as too defensive for such a strong credit (thereby sending out the wrong message to the market), but the strategy paid off.

ôBoth the price and the size were impressive, and the deal was a great achievement for the issuer,ö says one source not connected with the deal. ôFrom the investorsÆ point of view, there wasnÆt much room for improvement, but thatÆs just the way of the Korean banks.ö

The Koreans have a reputation for leaving very little margin for their investors.

Sung-Uk Hong, head of international funding at Kexim, countered this. ôWe believe the last transaction (a Ç750 million deal in February) was priced appropriately," he says defensively. ôInvestors were happy. Kexim always wants to get a fair market price, and this latest issue is also at a fair price.ö

One investor seemed pleased with the pricing level: ôThe spread between KeximÆs five-year CDS and where this bond priced (17bp) was quite generous for a quality issuer. Most Korean issuers price very tightly and you always know that you are not going to get a free ride from a Korean quasi-government agency. Also, I am confident the bonds will tighten quietly over time. IÆm perfectly happy with the trade.ö

Yesterday investors could buy protection or Kexim five-year CDS at offered-side of 33bp, and buy the bonds at 50bp, getting risk-free exposure at a 17bp spread. In the US, the spread for investment-grade credits has been between 20bp or 40bp, meaning that Kexim broke through that 20bp threshold.

KeximÆs borrowing activities remained constant throughout the summer deadlock, when it raised funds in Mexican pesos and Brazilian reals, but yesterday the market was welcoming enough to tap a dollar issue. ôThe market has improved substantially since the middle part of last week leading up to the payroll numbers. The pre-earnings announcements from some of the banks and the stronger equity markets also helped, combined with the fact that people are feeling that the worst of the subprime is behind us,ö says one observer. ôAs a result, investment grade names across the board are five, 10 even 15bp tighter, while ICICI has tightened by 25bp.ö

But the markets arenÆt back yet. A syndicate banker in Hong Kong observes: ôThere is still a little reluctance. We wonÆt return to April/May levels anytime soon but people are actively engaged in looking at new issues. This is a good development.ö

And one investor observes: ôThe market will tighten as Christmas approaches. ThereÆs a lot of money to put to work and we havenÆt had much issuance. The financial markets are not so stressed and funding is getting a little cheaper now. New issues are coming, and others are getting done with very high levels of subscriptions. This tells you that cash has been accumulating and that people are just waiting to use it. Meanwhile, we will see more issuance from Korea.ö

This was one of KeximÆs intentions, it seems: ôThis deal sends out the message that borrowers can raise a substantial amount at a reasonable price. Of course, these levels are not near what we achieved for our last euro deal in January, but we live in a new world, and issuers need to adapt. This was a good time to come to market and we wanted to open the gates for other Korean issuers.ö says Hong.

But some are more pessimistic: ôI think the deal was too big, taking a lot of the liquidity out of the market. Other Korean issuers will have trouble issuing now,ö says one observer. "Also, I don't think there's enough of a pricing cushion here. If the market rallies, this won't be a problem, but it will be an issue if there's a downturn. This shouldn't be discounted, as these are still vulnerable markets."
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