After a few weeks wilting in the desert, Asia-based debt capital market bankers have suddenly been invigorated. Several new dollar deals have gone live, and expectations are high that further mandates will be awarded soon, despite Europe’s worsening sovereign debt troubles and anxieties about the state of the Chinese and global economies.
Korea, the source of the region’s most prolific issuers, is naturally in the vanguard. Korea Hydro & Nuclear Power (KHNP) priced a $500 million 10-year deal early yesterday morning. It was the first 10-year international public bond offering by a Korean government-owned corporate issuer so far this year.
The notes pay a 4.75% coupon and were re-offered to investors at 97.591 to yield 5.06% with a maturity date of July 13, 2021. The yield was equivalent to 195bp over the 10-year US Treasury benchmark and 181bp over swaps.
The joint-bookrunners were Barclays Capital, Goldman Sachs, Morgan Stanley and Royal Bank of Scotland, with Samsung Securities also taking a lead manager role. They took company representatives on a three continent roadshow in late June, visiting New York, Boston and Los Angeles, London, Hong Kong and Singapore.
Initial price guidance for the deal was 200bp to 210bp over the US Treasury yield, which then tightened to 190bp to 200bp as orders from US accounts gathered momentum on Wednesday evening. The relative scarcity of an issue by a Korean utility — as a welcome change from the usual financial offering — and the rarity of 10-year paper seemed to justify the yield spread. Otherwise, it looked expensive.
Extrapolating from where last year’s KHNP 2014-dated issue was trading suggested that a new five-year would need to price at 205bp, according to an analyst. A 10-year bond would normally have a to pay a wider premium because of the positive shape of the Treasury yield curve and to compensate investors for the greater risk they would assume for lending for longer. But a shortage of high-quality 10-year Asian bonds meant that KHNP could launch its deal inside its theoretical curve — and indeed, tighter than an existing 10-year issue by Export-Import Bank of Korea, a state-owned policy bank with the same credit ratings. It was also the first time that KHNP has raised 10-year money in the international capital markets.
Late yesterday afternoon, the bonds were trading stronger, bid at 193bp over the Treasury yield.
The issue was sold to US investors under the SEC’s Rule 144a and they seemed to drive the order book, and hence determine the final pricing. The lead mangers received total demand worth $1.8 billion, made up of about 150 orders. Geographically the allocations were approximately split 47% into the US, 31% into Asia and 22% into Europe. By investor type, 47% was placed with fund managers, and 22% was bought by commercial banks, 21% by insurers and pension funds, 6% by supranational agencies and 2% each by retail and others.
The senior, unsecured notes are rated A1 (stable) by Moody’s and a notch lower at single-A (stable) by Standard & Poor’s, and were drawn down from the company’s $5 billion global medium-term note programme.
KHNP is a wholly owned subsidiary of Korea Electric Power Corp (Kepco) and is Korea’s only nuclear power generation company. Investors were reassured that its nuclear reactors are modern and technologically advanced, and that Korea isn’t vulnerable to the same tectonic activity as Japan.
A person familiar with the transaction argued that KHNP was able to successfully issue the bonds due to “its strong credit profile and strategically important role to Korea and the Korean economy ... while other Korean issuers, who planned to tap the market earlier remain sidelined due to volatile market conditions, set off in part by the Japan earthquake and the continuing European sovereign debt-related headlines”.
Also in the power sector, NTPC (National Thermal Power Corporation) was about to price a 10-year, Regulation-S transaction last night. NTPC is India’s biggest state-owned power generating company and is rated BBB- by both Standard & Poor’s and Fitch.
The joint-bookrunners — Barclays Capital, Citi, Deutsche Bank and Royal Bank of Scotland — had approached Asian and European investors with an initial spread proposal of 265bp for a benchmark-size issue, but by yesterday evening guidance had tightened to a range of 255bp to 260bp over the US Treasury yield.
Meanwhile, Kookmin Bank, Korea’s largest commercial bank, priced a $300 million 5.5-year Regulation-S deal last night at 208bp over the Treasury curve.
It pays a 3.625% semi-annual coupon and was re-offered at 99.114 to yield 3.805% with a maturity date of January 14, 2017.
The senior, unsecured notes are rated A1 by Moody’s and single-A by both S&P and Fitch. The joint-bookrunners were BNP Paribas, ING, J.P. Morgan, Royal Bank of Scotland and UBS.
The offering attracted orders worth $1.4 billion from 120 accounts. Most of the deal (80%) was placed in Asia and the balance distributed in Europe. Commercial banks bought 47% of the deal, fund managers 27%, insurers 8%, central banks and private banks each took 7%, corporate treasuries 3% and others 1%.
So it seems that there will be a flurry of new issuance before the summer break. But, there is unlikely to be the same level of demand during the next six months as enjoyed by borrowers at the beginning of this year.
Cash spreads in Asian credit markets in June closed 9bp and 56bp wider across investment-grade and high-yield corporate bond issues respectively, although sovereign bonds benefited from a move to better quality assets and tightened 14bp. Since then, markets have recovered, but Nomura sales and trading analysts expect “the current rally to run into headwinds”, and are looking at sectors with value that will not necessarily be overwhelmed by heavy issuance”. And, apparently, the pipeline is building up rapidly.
