Kia Motors re-prices Korean yield curve

A tightly priced dollar issue by Kia Motors has set a precedent for the non-investment grade sector in Korea.
In what represents the first non-investment grade bond deal by a Korean corporate, Kia Motors has raised $200 million from international investors. A five-year fixed rate deal was priced last night (Tuesday) via lead manager Credit Suisse First Boston at nearly 200bp inside the comparably rated Korean sub debt sector.

Priced at 99.263%, a BB-/Ba3-rated issue for Kia Motors carries a coupon of 9.375% to yield 9.564%, or 470bp over Treasuries. KDB Asia acted as co-lead.

At this level, investors were said to be attracted to the prospect of high yield from a credit many now feel comfortable with despite the fact that the company was placed into receivership only three years ago. Following meetings with over 80 investors, books are said to have closed one-and-a-half times oversubscribed, with the final participation of 28 accounts.

By geography, most demand was concentrated in Asia, with 75% of paper allocated to the region, of which 57% went to Hong Kong, 23% to Singapore and 10% to Korea. US investors then accounted for a further 17% and European investors the remaining 8%. By investor type, asset managers picked up 53%, followed by insurance funds on 24% and banks 23%. Virtually all were emerging market rather than high yield funds and most already had exposure to Korea.

“Some investors may have wanted to reduce their exposure to the Korean banking sector, but there were very few switches,” one observer reports. “This deal was done on an all-cash basis.”

US investors were said to have been particularly interested in the deal, but most baulked at a yield of less than 10%. "A lot of high yield accounts expressed initial interest, but found final pricing too expensive," the observer continues. "They didn't want to take anything below 10% and especially not when the Korean sub debt sector is yielding around 10.3%."

Against virtually any benchmark, Kia Motors scores an impressive achievement. The US double B high yield index, for example, is currently trading at the 528bp mark, while a comparable 2007 bond puttable in 2004 by parent company Hyundai Motor is trading at a 410bp level on a one notch higher rating and two-year shorter maturity.

Positive momentum generated by Kia has also aided the parent, which was trading at a 441bp level when roadshows began. Korean spreads have been the year’s star performers and the performance of the Hyundai Motor group has been no less spectacular. Less than a year ago, the company had an incredibly weak single-B credit rating and one year from now, some believe that the company will be back in investment grade territory again.

“The only reason the two companies remain mid to weak double B credits is because they still need to prove themselves,” one banker concludes. “Kia Motor is also quite small and production is heavily geared to the recreational vehicle sector, which is cyclical.”

Financial ratios, on the other hand, suggest a strong BB rated credit. With W5.1 trillion in debt as December 2000, Kia is currently operating a debt-to-EBITDA ratio of 2.4 times 2001 earnings and an interest coverage ratio of 3.5 times. It also has a smooth maturity profile, with equal instalments coming due between 2002 and 2008.

Lead bankers are likely to believe that the success of their 144a offering may open up new opportunities for second-tier Korean corporates. Certainly observers report unsatisfied demand from Hynix's pulled $350 million deal of late June.

"The Hynix deal generated interest in lower grade corporate Korea, but it wasn't satisfied," one player concludes. "Many investors have subsequently seen Kia as a unique investment opportunity offering them high yield and an improving credit story."