Despite nervous and confused markets, Korea’s newest policy bank launched a successful and uncomplicated bond issue this week on the back of a strong bid by US investors. Korea Finance Corporation (KoFC) raised $750 million with a 10-year deal, satisfying demand for yield and duration, yet achieving cost-savings by taking advantage of an inverted curve.
The issue was priced at mid-day on Tuesday in New York at a spread of 265bp over the 10-year benchmark US treasury yield, which was at the tight end of final guidance. Initial marketing set a range of 275bp to 265bp. In early trading, the bonds were quoted at 263bp-259bp, and yesterday were bid in Hong Kong at 258bp.
The senior, unsecured notes pay a 4.625% coupon and were re-offered at 99.699, yielding 4.663% to a maturity date of November 16, 2021. The issue was launched from KoFC’s $5 billion shelf programme registered with the US SEC and the proceeds of the issue will be used for general operations and for providing foreign currency loans.
The spread curve is inverted between five and 10 years for Korean policy-bank bonds, so it made sense for KoFC to issue a longer-dated maturity and thereby lock in cheaper Libor-linked funding with a swap into a floating-rate liability.
As KoFC looks to establish a US-dollar senior curve, management has said it aims to issue US dollar senior bonds twice a year to fund its loan growth. But, the KoFC deal is likely to be the last public issue in the US dollar market this year by a Korean policy-bank, according to bankers familiar with the deal.
Before the final pricing, William Mak, highly rated analyst on Nomura’s sales and trading desk, saw fair value at around US Treasuries plus 255bp — about 10bp wider than where the recently-issued Export-Import Bank of Korea (Kexim) 4.375%, September 2021 issue was trading at the beginning of the week. A spread premium would be necessary because KoFC is a relatively new name for US investors, and besides, some of them might not yet have credit lines in place.
Mak pointed out that only 24% of the KoFC 2016 bonds were initially allocated to US investors, compared to a usual 40% to 50% placement of Kexim bonds with US accounts.
The final book size was more than $2.4 billion, made up of orders from more than 170 accounts.
Geographically, US investors were actually the biggest buyers, taking 51% of the issue, while 36% and 13% was placed in Asia and Europe respectively. By investor-type, 57% was sold to asset and fund managers, 15% to commercial and private banks, 15% to insurance companies and pension funds, 8% to companies and 5% to central banks.
“The offering was swiftly executed with an intra-day book building process to cover Asia, Europe and the US, with deal announcement and initial price guidance during the Asia morning session on November 8,” according to a statement released by the bookrunners.
Bank of America Merrill Lynch, Credit Suisse, HSBC, Royal Bank of Scotland and Daewoo Securities were joint bookrunners and lead managers.
The issue is rated A1 by Moody’s and the equivalent A+ by Fitch — which raised its sovereign and KoFC outlook to positive this week — but a notch lower at single-A by Standard & Poor’s.
KoFC was set up to take over the policy banking role of Korea Development Bank’s (KDB) as part of the latter’s privatisation process. It was established in October 2009, and is now the country’s only integrated public policy financial institution, mandated to enhance the country’s competitiveness and growth potential, facilitate job creation, support small- and mid-size enterprises, and support Korea’s financial system through lending operations.
KoFC travelled to the US on a non-deal roadshow earlier this year to sell its story, and spread the message that it has basically taken over the public sector activities of KDB, fully-supported by the Korean government.
“The timing of a revised positive outlook for the sovereign credit rating by Fitch and the extension of contingency currency swap arrangements made by the government with China and Japan was especially fortuitous,” said Bong Sik Choi, senior executive director at KoFC, in an interview with FinanceAsia. “Earlier in the year, we visited investors throughout the US to explain the status and plans of KoFC, and emphasised the support provided by the government. Preparation and circumstances formed the foundations of a highly successful and satisfying transaction.”
S&P is confident that “there is an almost certain likelihood that the government would provide timely and sufficient extraordinary support to KoFC in the event of financial distress”, according to its credit analyst Takahira Ogawa in a statement on November 8. But, S&P’s rating also reflects “uncertainty regarding KoFC’s financial and business risks, given its lack of a track record as a standalone entity, and its future role”.
Nevertheless, KoFC enjoys strong direct support from the Korean government, including capital injections, direct lending provisions, and a government guarantee. KoFC also acts as the major shareholder (90.26%) of KDB Financial Group (KDBFG), which in turn controls KDB, Daewoo Securities, KDB Capital, and KDB Asset Management, and Korea Infrastructure Investment Asset Management, until the shares in KDBFG are sold.
The government has a legal obligation to maintain KoFC’s solvency, based on the provision of article 31 of the KoFC Act. In addition, Article 4 of the act stipulates that the government provide all of the corporation’s capital. S&P regards this statutory obligation as a sign of the government’s commitment to support KoFC rather than the government’s legal obligation of timely payment for all of the corporation’s obligations.
“KoFC is a relatively new institution, but we expect to access international markets in various currencies as we grow. We are keen to diversify and expand our investor base, and, for instance, have already set up an Australian dollar medium-term note programme,” said Choi.
KoFC has already raised $1.85 billion in the international bond markets, against a revised 2011 target of $2 billion. Next year’s target will be determined after discussions with the government about lending requirements.
KoFC’s unconsolidated total assets stood at W61.8 trillion ($57.3 billion) as of June 2011.