KorAm mandates sub debt deal

And awards books to its house bank.

Salomon Smith Barney has fought off competition from shortlisted rivals Deutsche Bank and JPMorgan to win the books for a $200 million lower tier 2 transaction for KorAm Bank. The result, however, is hardly a surprise given that Salomon has led every single one of KorAm's recent capital markets transactions including a $200 million GDR with Goldman Sachs in April and a novel $160 million sub debt deal last December.

Winning the mandate stands testament to the US investment bank's pioneering work with December's kimchi offering and its strong distribution network in the Republic. It also reflects the continuation of a close relationship with Michael Kim, the Korean head of the Carlyle group (KorAm's major shareholder), who was formerly Salomon's head of Asian investment banking.

In many ways the new 10 non-call five offering is expected to be very similar to the kimchi deal, which had the same structure and was devised by Salomon as a means of raising dollar-denominated debt with full Eurobond documentation, while placing paper with domestic rather than international accounts. Bankers say that while the arbitrage between the offshore and onshore markets is not as favourable as it was last year, domestic accounts are expected to be keen buyers of the new deal.

Many have also long held the view that KorAm is more favourably viewed by domestic accounts, which appreciate the strength of its credit ratios rather than international accounts, which tend to prefer banks with strong sovereign backing.

The deal is expected to be launched within a month and KorAm is said to be targeting a spread of 260bp over Treasuries. This is considered aggressive relative to slightly higher-rated comparables, although the small size of the transaction and Salomon's placement power in Korea could swing the difference.

The most relevant comparables are Cho Hung Bank and Hanvit Bank (now Woori) which both have Baa3/B+ ratings for lower tier 2 debt and outstanding deals with two-and-a-half-year maturities. By contrast, KorAm has a one notch lower rating of Ba1 from Moody's and no sub debt rating from Standard & Poor's.

On a Libor basis, KorAm is hoping to price at 202bp over, compared to a current trading level of 199bp for Hanvit and 190bp for Cho Hung.

Hanvit's 11.75% March 2005 transaction is bid on a high cash price of 116.50% to yield 4.55% or 240bp over two-year Treasuries. Cho Hung's 11.5% April 2005 issue is bid slightly tighter, trading on an equally high cash price of 116.5% to yield 4.58% or 243bp over Treasuries.

KorAm is keen to do a deal because it wants to re-build its capital ratios back to the 12% standard of the world's leading banks. It had previously been able to boost its CAR to this level as a result of the GDR offering, but has since slipped back again because of its growing asset base. From Won28.4 trillion ($23.8 billion) at the end of 2001, assets had grown to Won32.3 trillion ($27.1 billion) by June, in turn pushing capital ratios down to 11% of which, tier 1 accounted for just under 7%.

As Nomura Securities analyst Brain Hunsaker comments, "Like most Korean banks, KorAm's asset base has been growing very quickly this year as it increases consumer lending. This has led to a better business mix and with a reduction in NPL's, means the bank has been able to improve its net interest margins from 2% to 3.2% over the course of the first six months."