Kookmin Bank executed its second covered bond offering in the space of three months on Thursday, demonstrating new stirrings of momentum in what is still a new asset class for Asia.
The A1/A/A rated bank's new $500 million five-year offering was almost a mirror image of last October's $500 million transaction, which represented Korea's first covered bond since the enactment of the country's Covered Bond Act in April 2014.
One fund manager said the order book for the new deal closed less than two times covered, similar to the $800 million in demand Kookmin attracted last October.
Pricing was initially marketed at 100bp over mid-swaps before being fixed at 90.1bp over on an issue price of 99.657% and coupon of 2.25%.
The bank's previous triple-A rated 2.25% October 2020 deal was trading on a mid-yield of 2.27% and spread of 85bp over mid-swaps during Asian hours on Thursday. It originally priced at 99.529% to yield 2.225% or 90bp over mid-swaps and only briefly dipped below issue price at the end of December.
Given the short duration between the two bonds, the new deal has effectively ceded a 5bp new issue premium. This is tight compared to other covered bond issuers, which have executed deals over the past nine trading days.
According to Rabobank research, the new issue premium for euro-denominated issues has ranged from 5bp to 14bp. Most recently, Commonwealth Bank of Australia offering a 5bp new-issue premium for five-year paper that priced at 33bp over mid-swaps on Wednesday and 7bp for 15-year paper, which priced at 50bp over.
"Conditions in the primary market are still a challenge," the Dutch bank wrote in a research note published on Thursday. It highlighted weak oversubscription ratios and high new issue concessions for the half dozen or so transactions priced since the beginning of last week.
However, it added that sentiment has improved somewhat since the beginning of this week. Kookmin picked a relatively benign day to launch its deal, taking advantage of firmer market sentiment following dovish comments by the US Federal Reserve on Wednesday.
In Europe - the main investor base for covered bonds - the market is also expecting further easing this March by the European Central Bank, which has been a big buyer of the asset class through its bond buying programmes.
A second pricing metric for covered bonds is the issuer's senior curve. Kookmin does not have any 2021 paper outstanding so the main benchmark in this instance was KEB Hana's recent 2.5% 2021 bond. One broker was quoting this at 110bp over on Thursday; a 19bp premium to Kookmin's covered bond pricing.
This also falls at the tighter end of a range, which typically spans 15bp to 30bp depending on the issuer. When it priced Singapore's first covered bond last July, for example, DBS came 23bp inside the theoretical level of its senior debt.
Korean issuance to increase
Bankers said Kookmin has been very happy with its experience in the covered bond market to date. It is likely to become a fairly frequent issuer given it has an $8 billion programme in place and the Korean government is pushing banks to transform their mortgage lending from a floating to a fixed-rate basis.
Covered bonds are a type of fixed-income security, which are backed by an asset pool (normally residential mortgages) and remain on-balance sheet unlike other forms of securitised debt. Their overcollateralisation means they command a higher credit rating and tighter pricing than senior debt.
"Some of the other commercial banks have been a little slow getting their act together," one banker remarked.
"However, this is not necessarily a bad thing," the banker added. "Kookmin and Korea Housing Finance Corp (KHFC) are establishing a standard template and setting benchmarks, which the rest of the market can then follow."
The banker said that KHFC is a slightly different animal to Kookmin since it has a one-notch lower rating because it does not have the same swap structure in place. It also has a different legal status since it is government-owned and governed by its own act rather than the Covered Bond Act.
As such, other commercial banks are likely to follow Kookmin's lead.
Bankers highlighted that Korea's covered bond legislation is extremely investor friendly compared to the UK and Australia where issuers need a guarantor and assets have be hived off into a special purpose vehicle.
One banker explained that Kookmin has based its template on Germany. Korean legislation stipulates a minimum over-collateralisation ratio of 105% and loan-to-value ratio of 70%.
There is also a maximum issuance ratio amounting to 8% of total assets, although bankers said the regulator has set initial guidance at 4% to begin with.
Kookmin is Korea's second largest bank by assets behind KEB Hana. But it makes sense to be the first covered bond issuer since it has the largest mortgage book.
According to its net roadshow, it held 25.5% of all Korean mortgage loans during the third quarter of last year, compared to Woori’s 20% market share, Shinhan’s 16.7%, NongHyup’s 13.7% and KEB Hana’s 12.1%.
At the end of the third quarter, 54.9% of its loan book comprised household loans.
The cover pool for both of its covered bond deals is exactly the same: 13,160 mortgages of which 88.3% are hybrids, 11.5% floaters and 0.2% fixed rate.
The weighted average seasoning is 24 months, the weighted average remaining tenor 314 months and the weighted average interest rate 3.56%. According to the group's net roadshow, 83.2% of the portfolio is concentrated in the Seoul metropolitan area and there is a delinquency rate of 0.3%.
Joint lead managers for the latest transaction were ANZ, BNP Paribas, Commerzbank and DBS.