Korea cuts a short story long

The market for long-term Korean bonds gets a boost from state mortgage company.

Korea's state mortgage provider has launched its first mortgage-backed bonds as part of a programme that will securitize around Won6 trillion ($5.1 billion) of mortgages over the next year. The deal is worth Won552 billion ($470 million) and is backed by mortgages provided through Hana Bank, Korea First Bank, Korea Exchange Bank and Samsung Life Insurance.

Korea Housing Finance Corporation (KHFC) opened for business in March, selling long-term mortgages, providing credit guarantees for home-buyers and buying mortgages from existing providers. The company plans to issue mortgage-backed securities (MBS) on a monthly basis and this first deal, through the KHFC MBS 2004-1 trust, is split into nine senior tranches ranging in maturity from one to 20 years.

The Won10 billion one-year notes offer a coupon of 4.14%, which represents a sperad of 5bp over one-year Korean treasury bonds. The Won32 billion two-year notes have a coupon of 4.28%, or 7bp over two-year treasuries. The Won50 billion three-year notes pay 4.33%, or 10bp over three-year treasuries.

All of the rest of the notes are priced against five-year treasuries and are callable. The Won110 billion five-year notes pay a coupon of 4.67%, which is a spread of 20bp, and are callable after three years, once the short-dated notes are redeemed. The Won130 billion 7.5-year pays 4.82% (35bp) and is callable at 3.5 years. The Won80 billion 10-year bond pays 5.04% (57bp) and is callable at four years. The Won50 billion 12-year bond pays 5.16% (69bp) and is callable at five years. The Won50 billion 15-year bond pays 5.22% (75bp) and is callable at six years. The Won40 billion 20-year bond pays 5.26% (79bp) and is partially callable. The subordinated tranche is a 21-year Won10 million bond paying 5.36%.

The notes were bought up with some enthusiasm, according to the head of KHFC's securitization team Kim Young-Man. A total of 19 investors bought the bonds, with Won220 billion going to commercial banks, Won200 billion to insurance companies, Won100 billion to pension funds and the rest to other asset managers.

Kim says that the corporation expects to issue Won70 trillion by 2008. Such issuance, it is hoped, will boost the market for longer dated bonds in Korea, lower the cost of buying a new home and encourage greater issuance of MBS.

The co-lead managers on the deal were: Hana Securities, Korea Development Bank and Samsung Securities. Deryook International Patent & Law Firm acted as legal advisers.