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Kexim's Hong: "It's a buyers' market"

As the Asian debt markets enters its sixth month under unpredictable conditions, Kexim's executive director Sung-Uk Hong discusses his expectations from the debt markets and whether Kexim can maintain its aggressive funding levels.
What has been your overall view of the debt markets so far this year?

For the first quarter it was good, the markets were flush with liquidity and spreads were steady. But in the second quarter, we saw volatility in global equity markets, there has been increasing uncertainty with regard to interest rate levels in the US and overall, spreads have pushed out.

So as a result, the bond market has been a bit unpredictable in the second quarter. However that said it hasnÆt been all doom and gloom. Total issuance overall is up well over 25% from this time last year, and on the whole spreads among top quality issuers, although they have widened somewhat have remained stable.

In terms of secondary performance, our outstanding issues have only moved out one or two basis points at the most. For example, KeximÆs Feb 2015 is currently trading at Libor plus 27bp, which is only 2bp wider than its comparative April levels.

Do you think that spreads will tighten back to there previous levels as they did after last years sell-off following GM and Ford, or do you think this is something more long-term?

In terms of spreads, I think the market will be dependent on the level of available liquidity. If the liquidity level remains high in the forthcoming months then I would expect to see a level of stability return to the market. However, that will also depend on what the US Federal Reserve does in coming months as well. If interest rates stabilise and donÆt increase much further, then we will see a strong liquid market and a more active environment in terms of new issuance.

So as we begin the second half of the year, in a volatile market, what are your expectations for the next six months?

I think for quality issuers like ourselves it isnÆt too much of a problem. Higher rated investment grade paper, like triple-A and double-A will remain comparatively stable. But I think that the high-yield bonds or the lower rated (triple B or below) investment grade issuers will find it more difficult in this kind of market.

Spreads on KeximÆs existing bonds in the secondary markets have not changed that much. Among Korean bonds, I think KeximÆs are among the most stable. If you look at our comparative maturity profile, ours is the longest. We are the only Korean issuer that has a curve out to 2015.That is why Kexim is regarded as a benchmark. So we try to give liquidity to the existing bonds as well as to ensure that they are actively traded and are well supported in the market and provide a solid point of reference for other issuers and that really helps us. That is why our secondary status is comparatively stable.

In terms of issuance, I recently visited investors in Europe and I think from June to August issuance will be slower than usual. Of course there is the World Cup in June and July, so from the second week of June there will be a lot less activity. In July summer vacations begin, so if we are looking for the issuance window to reopen, it will be toward the end of August flowing into September and October.

So how are you approaching the market in terms of completing the remainder of your annual funding requirements?

We still have about $1.5 billion to raise this year, and we will definitely come to the market sometime this year, but as to when I am not so sure. Fortunately, because of our strong liquidity position we have the ability to wait and choose when we think is the right time to issue, as opposed to having our hand forced by an upcoming maturity or predetermined funding need. Our liquidity gives us quite a lot of room to maneuver. When you have sufficient liquidity in your account, you can always play like that, but if you are in need of desperate money, then that strategy doesnÆt work.

It is currently a buyerÆs market for certain. How or when we decide to come to market will entail a lot of study, because in volatile markets the appetite of investors is constantly evolving.

In this kind of market, I think it is best to listen to investors. If investor demand for floaters is high, then go for a floater. If investors want fixed rate deals then go for the fixed. I think you must play to the investor demand.

As I said Kexim is in a very fortunate position. As a benchmark with a strong issuance history we are able to bring deals to market in 24 to 48 hours if need be. This allows us to be able to take advantage of opportunities as they present themselves, which is something other borrowers in Asia are not able to do.

You have always tried maintained a rather aggressive funding strategy in the past - earlier this year you were hoping to tighten new issue Kexim spreads by 5bp; with the spreads pushing out are those levels still feasible?

As a strategy, we would like to tighten one or two basis points on each deal, but if that isnÆt feasible in these market conditions then we have to accommodate to that environment.

We cannot control the market. Yes, we would like to see our deals tighten to a level that we think is competitive to credits that are of comparative strength, but at the end of the day we understand the markets appetite for risk and adjust our strategy accordingly to catch the right wave.
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