The transaction, which was initially targeted at between $200 million and $300 million, priced ahead of the non-farm payroll report in the US and just prior to the week of Chinese New Year, garnering $1.2 billion worth of orders.
"It was a pretty tough week. We had the FOMC meeting on Wednesday, the non-farm payroll report on Friday and Chinese New Year this week," says a banker close to the deal. "So it was a narrow window that we managed to squeeze into. In these markets, it's wise not to wait."
The transaction priced 70bp back from Korea Development Bank's 2013s, 95bp back from Korea Electric Power Corporation's (owner of Komipo) CDS, and significantly wider than many would expect from an issuer of this quality (A1/A-). This led a number of rival syndicate bankers to state that the deal came very cheap. Others were more forgiving, arguing that in terms of absolute yield (5.505%), borrowing levels are still at historic lows.
ôOn an absolute, as well as a real-rate basis (if you consider where inflation is), these funding levels are fine,ö says a banker not involved with the deal.
He also argues that it is no longer so easy to compare pricing levels to secondaries. While the Philippines and Indonesia benefit from liquid benchmark curves on which they can price their deals, there is no regular trading or active benchmarks in the Korean sector. ôIn calmer markets, you can draw on various data and think about relative value. But in this case, there were no liquid benchmarks and, unlike the Philippines and Indonesia, we can go days without seeing prices appear on the screens. So these comparables are not really relevant,ö says the banker.
Guidance was initially indicated at 212.5bp +/- 0.125 over mid-swaps, with the deal then launching at 200bp. Finally pricing at 198bp, the bonds have rallied by 10bp since Friday, indicating that the bonds were correctly priced.
ôPerformance is fairly binary at the moment. You either see a 10bp-15bp rally, or you donÆt see any performance at all. Bonds donÆt tighten by just 3bp-4bp right now,ö says an investor.
ôYes, the bonds did come very cheap relative to fair value since in these terms the bonds should come no more than 35bp back from Korea Development Bank,ö he adds. ôHowever, the leads needed to price at these levels to get interest from a sector which is fairly unloved at the moment. Also, they couldnÆt get too cheeky since this is, after all, the first corporate of the year.ö
A banker close to the deal added: "US borrowers such as Citi and Wells Fargo have priced bonds that rallied by 10bp-15bp in their first trading session. This is what investors need to see in order to participate in deals."
Sources on the buy-side also say that there have been no loose bonds, indicating that the issue was placed in safe hands, and added that investor communication was clear and well-handled.
The deal does reflect, however, the challenges faced by Reg-S deals. ôThe US has been very important to all transactions recently, and they could have probably achieved better pricing levels had real-money US investors participated in this transaction,ö says a banker. ôItÆs important to engage buyers globally to achieve the best possible pricing."
Komipo chose not to undertake the time-consuming registration process for 144A transactions.
"As a result, we will have trouble pricing 144A transactions at more favourable levels, since investors will point to this deal and not necessarily distinguish between Reg-S only and 144A transactions," he continues.
Komipo is one of six wholly-owned generation subsidiaries of Korea Electric Power Corporation.
Please refer to the pricing terms published by FinanceAsia on February 4 for full pricing details.