Kookmin Bank has priced a $500 million three-year floating rate note, following in the footsteps of Kexim, a South Korean policy bank, which issued one last month.
The note – which was six-times oversubscribed from 150 accounts – had an initial price guidance of about 140bp above the three-month US dollar Libor but priced competitively inside its existing curve at 125bp, indicating strong demand for these rare notes.
The bond was being compared to two outstanding comparables: Kookmin’s 2016s and 2017s, both of which had a Z-spread of 120bp and 142bp. After adjusting for the curve, fair value of the new bond is 136bp, notes one source.
A Z-spread – also known as a zero-volatility spread – measures the spread that the investor will receive over the entire US Treasury spot rate curve.
“The investor base for floaters is slightly different – you don’t get as many real money guys involved in Asia because they don’t have short-term portfolios,” said a source close to the deal. “But we attracted a number of very high quality bank treasuries, not only from Asia but from Europe and Middle East as well.”
Fund managers and asset managers subscribed to nearly half of the notes at 48%, followed by financial institutions at 41%, central banks 6%, and private banks and others at 5%. Asian investors took a chunk of it, accounting for 59%, followed by Europe with 21% and US 20%.
Kookmin’s floater was issued under the bank's existing $8 billion global medium-term note (MTN) programme, which is rated (P)A1 by Moody’s.
Bank of Merrill Lynch, Barclays, BNP Paribas, Credit Suisse, HSBC and Mizuho Securities are the joint bookrunners of the deal.
Floating rate notes are a small part of the fixed-income world and are rare in Asia, although they are more common in the US. However, amid uncertainty over rising rates, more borrowers could wade into the floating rate space.
“There is a strong technical bid for floating rate notes and, given that Asia has been undersupplied, I’m sure we will continue to see more,” said a source. “Also, investors are poised to benefit from more floating rate products given the interest rate cycle, which is expected to increase in coming months.”
Banks are ideal candidates for floating rate note issuance given that these institutions manage their asset and liabilities on a floating rate-basis, adds the source.
For example, Kexim issued a $500 million three-year floating rate note along with a $500 million five-year bond on September 12. The floater priced tighter – at three-month Libor plus 86bp compared to initial guidance at the area of Libor plus 95bp.
Also, the Korea policy bank’s three-year floater saw $2.1 billion of demand, with fund managers, as well as central banks and sovereign wealth funds, subscribing to a bulk of it at 43% and 40% respectively. Private banks took 16% while companies and other investors 1%.
Bank of America Merrill Lynch, Citi, Deutsche Bank, Goldman Sachs, HSBC and Mizuho were joint bookrunners.