KoFC plans benchmark US dollar bond by year-end

KoFC was on the road last week meeting international investors, ahead of tapping its EMTN programme later this year.

Korea's newest state-owned policy bank plans to launch its first foreign currency benchmark-sized bond issue later this year. Korea Finance Corporation (KoFC) set up a $10 billion euro medium-term note programme (EMTN) in April, and received a rating equal to the Korean sovereign from the leading rating agencies. It is expected to apply for registration by the Securities and Exchange Commission and preliminary documentation is likely to begin in July.

Executive director Bong-sik Choi headed a delegation from KoFc on a five-day non-deal investor roadshow to Hong Kong and Singapore last week. It was the second round of meetings since the bank was inaugurated in October 2009.

"Developing and cementing investor relations is important, as we build the infrastructure for future funding in the inter-bank, money and bond markets," Choi told FinanceAsia.

A global roadshow in December, which included visits to Europe and the US as well as Asia, was focused on explaining KoFC's structure, purpose and funding intentions to central banks, policy financial institutions and regulators.

"We are establishing a foundation for the future, and have already received a high level of approval from investors. In particular, investors have been very positive about Korea: the resilience and strength of its economy in the wake of the global financial crisis, the response of the government through fiscal stimulus and banking sector support, and the quality and financial health of the country's leading companies," said Choi.

The EMTN programme has been assigned the Korea foreign currency sovereign ratings of A1 (Moody's), single-A (Standard and Poor's), and A+ (Fitch).

KoFC has mandated Barclays Capital, BNP Paribas, Citi, Deutsche Bank, Nomura and Royal Bank of Scotland as its EMTN dealers; Barclays Capital is the arranger.

KoFC's total funding requirement for the year is W14.6 trillion ($12.85 billion), including $1 billion in foreign currencies. Between January and the end of April, it raised W4.2 trillion in the domestic bond market with tenors up to five years and a spread of around 40bp over KTB yields

KoFC, established in October 28, 2009, was spun off from Korea Development Bank (KDB), which is being privatised. It acts as the holding company of KDB Financial Group, which in turn controls KDB, KDB Capital, KDB Asset Management, and Daewoo Securities.

KoFC is wholly state-owned and the government is legally required to provide funds to cover any loss it may incur that cannot be covered by its own reserves.

The government is also legally obliged to maintain the bank's solvency, based on the provision of article 31 of the KoFC Act. However, Standard & Poor's regards this statutory obligation as only a sign of the government's commitment to support KoFC rather than a legal obligation of timely payment for all of the bank's obligations. Article 4 of the same act stipulates that the government provide all of the corporation's capital.

KoFC's assets and equity on a standalone basis rose to W40.5 trillion and W18.1 trillion, respectively, at the end of 2009 from W23.8 trillion and W3 trillion at the end of October 2009, following the government's injection of a 94.3% stake in KDB Financial Group into KoFC, according to Fitch Ratings. Its consolidated total assets -- including KDB Financial Group -- stood at W182.9 trillion.

The bank is mandated to enhance the country's competitiveness and growth potential, help job creation, support high-tech start-ups, facilitate investments in social capital, aid regional development and support Korea's financial system through its lending operations.

"KoFC will concentrate on financing new growth industries, infrastructure, regional development and projects with significant social benefits. We will support Korean companies both domestically and in their overseas activities," said Choi.

"Given the mandated policy roles, KoFC neither competes with commercial banks nor seeks to maximise its profit," according to a report by Fitch Ratings on April 15. In its first three months, however, KoFC was not especially active. Its policy role-related loans rose just slightly to W4.3 trillion by the end of 2009 from W4 trillion at its establishment in October -- and mostly these were loans to Korea's Bank Recapitalisation Fund, noted Fitch.

The robustness of the Korean economy has in part militated against a sense of urgency.

Korea's economy has recovered strongly since the second quarter of 2009. It expanded 1.8% in the first quarter of 2010 from the previous three months, and in April exports surged 31.5% from a year earlier, which was the sixth straight month of gains. President Lee Myung-bak predicts GDP growth of more than 5% this year.  

Meanwhile, the Bank of Korea is under pressure from some analysts to withdraw monetary stimulus and hike interest rates as consumer spending has strengthened. Unemployment has also fallen, dropping to 3.7% in April after climbing to 4.8% in January.

But the currency has bounced 8.6% against the US dollar in the past year, dampening import prices. Inflation is at 2.6%, which is within the official target of between 2% and 4%. The European debt crisis is also likely to cause the central bank to maintain a cautious approach.

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