Korea continues to hold centre stage

SK Telecom flies through the bond market, as Korea Highway hopes to follow and the sovereign mandates six banks for non-deal roadshow.

The success of a $300 million eurobond for SK Telecom yesterday (Wednesday) has demonstrated how keen investors remain on Korean paper despite the uncertainty created by the impeachment of the country's president Roh Moo-hyun. Within a day of launching roadshows on Monday, the A3/A- rated cellular operator had managed to build up a $2 billion order book, so decided to shut up early, cut out roadshows in the US and price through guidance.

Under the lead of Citigroup and Credit Suisse First Boston, a seven-year 144a deal was priced at 99.271% on a coupon of 4.25% to yield 4.372%. This equates to 118bp over Treasuries, or 79bp over Libor. Fees were 30bp.

The deal was initially marketed at 120bp to 125bp over Treasuries and 83bp to 8bp over Libor.

Separately, many might think the words SK group and telecoms sector would be enough to make any investor shudder. Yet, together they attracted 113 accounts, with a very strong showing from the US.

The $2 billion book encompassed one order for $100 million, one for $80 million and a handful above the $40 million mark. US insurance funds, in particular, are said to have put in sizeable bids, which they hoped to see filled.

By geography, the books split 46% US, 43% Asia and 11% Europe. Only about 6% of demand came from Korea since the group's domestic debt carries a higher yield. Indeed, part of the deal was swapped back to Won as it is currently more cost effective to price in dollars.

By investor type, fund managers took 35%, banks 34%, insurance companies 29% and retail 2%.

One of the main reasons why the deal's reception was so strong can be explained by its rarity value. SK Telecom is one of the main benchmark stocks in Korea and has the highest market capitalization on the stock exchange behind Samsung Electronics.

It represents the kind of pure corporate exposure investors rarely get a chance to own in the international debt markets. Aside from LG Caltex and Hyundai Motors, virtually the whole Korean credit curve is populated by banks and quasi-sovereign entities such as Kogas, Kepco and Korea Highway.

These provided the main benchmarks for sovereign rated SK Telecom, which was upgraded to full single-A status a couple of weeks ago after Moody's lifted its rating one notch from Baa1. At the time of pricing, for example, Kogas had a November 2010 bond trading at 71bp over Libor.

Further afield, Baa2/A- rated Telekom Malaysia had a December 2010 at 80bp over Libor and A+/A1 rated SingTel a December 2011 bond at 56bp over.

Pre deal, SKT is said to have run a debt to EBITDA ratio of 0.9 times and EBITA/interest coverage ratio of 15 times. Last month, the group reported strong fourth quarter figures, that showed a 169% rise in net income to Won433 billion thanks to expanding mobile data usage and increasing MOU. Both EBITDA margins and ROE remained high at respectively 49.3% and 35.8%.

During 2004, the group has issued guidance that revenues should rise about 7% and ARPU about 3%.

The next bond from Korea is expected to be Korea Highway Corp, which will begin roadshows in Singapore on Monday, followed by Hong Kong Tuesday and New York Wednesday. The group is hoping to raise $500 million from a 10-year bond via Citigroup, Deutsche Bank and JPMorgan.

Citi and Deutsche were lead managers of the sovereign rated group's inaugural bond in June 2003. Korea Highway has a fairly heavy capex schedule over the coming few years and prefers longer-term funding to meet its project requirements.

Its debut deal was also a $500 million, 10-year. Pricing came at 99.066% on a coupon of 4.9% to yield 5.02% or 158bp over Treasuries. At the time, it represented a 56bp pick-up to the sovereign.

Today Korea Highway is trading around the 4.77% level to yield about 101bp over Treasuries or 79bp over Libor. This represents a 37bp pick-up to the Republic of Korea's 2013 bond.

The sovereign itself has formalised plans for a non-deal roadshow during the last week of April. Six banks have been mandated to arrange presentations, with Deutsche Bank and JPMorgan handling Asia, Barclays and UBS Europe and Citigroup and Goldman Sachs, the US.

The team will be lead by Deputy Prime Minister and MoFE (Ministry of Finance and Economy) head Lee Hun-jai. A new sovereign bond is expected shortly after although the government has not yet made a final decision despite receiving National Assembly approval for a new issue.