Korea bond sees huge Asian demand

The Republic of Korea returns to market and reprices the entire country''s credit curve in a strong deal driven by Asia.

The Republic of Korea has returned to the bond market with a successful $1 billion bond led by joint global coordinators Barclays, Citigroup and Goldman Sachs.

The 10 year bond gained an order book well in excess of $4 billion and priced at treasuries plus 92 basis points, equating to a yield of 4.307%. This feat ended up repricing the whole Korean credit curve.

Prior to the issue, the KDB has been Korea's proxy sovereign credit and was trading at T+120bp at the time the Republic announced the deal. By the date of pricing KDB had tightened to T+107bp.

The lead managers cleverly built the book by initially marketing the deal in Asia without any price talk. Demand of $3 billion had already been collected by the time the initial talk of T+95 was released and demand continued to grow as price talk settled at T+92 - a classic momentum-building strategy. Asia drove the deal, reinforcing the phenomenon known as the Asian Bid. The deal's distribution was heavily skewed towards the region, with almost 75% placed in Asia - mostly among commercial banks.

Korean buying was, however, less than 10% of the total, with Europe taking about 15% and the US taking the remainder. The distribution numbers stand in marked comparison to the last time the sovereign came to the bond markets back in 1998. At that time Korea was on its knees thanks to the currency crisis and demand was heavily skewed to the US.

Moreover, the runaway success of this deal came in spite of fears of North Korean aggression and the ongoing troubles at SK global. It is reckoned the sheer rarity value of the name helped to generate demand.

On a Libor basis the deal came a great deal tighter than many expected. Initially it was thought the deal could price as wide as Libor +80, but it actually priced at Libor +56. That is well inside the Republic's 08 bond which trades at Libor +65. Significantly the 08 is only half the tenor of the current, tighter bond. One reason why the deal was able to lock in such tight pricing was that investors knew the deal would not be increased in size. The sovereign does not need the money, but was merely keen to create a new tighter benchmark from which corporate Korea could benefit.

Indeed, the deal is likely to be followed in quick succession by two other Korean deals. Barclays and HSBC have the mandate for a $200 million tap of Kookmin's 4.625% December 2007 bond. This deal is expected to be the one to immediately follow the sovereign. Then Citigroup and HSBC plan to launch a $300 million to $500 million five-year deal for the Industrial Bank of Korea.

The deal had 11 co-managers who agreed to participate purely for relationship reasons and are: Credit Suisse First Boston, Daiwa SMBC, Deutsche Bank, Lehman Brothers, JPMorgan, Morgan Stanley, UBS Warburg, Samsung Securities, Daewoo Securities, Hyundai Securities, and LG Investment & Securities. None received bonds or fees.

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