Korea Highway Corp targets international bond market

The government-owned road builder is expected to become one of the Republic''s most active international issuers.

Submissions for a $300 debut bond deal were due yesterday (Wednesday) with eight banks invited to pitch for a 10-year deal, which should emerge early next year. Competition to win the mandate is said to be fierce given the high prospect of repeat issuance and two banks are likely to be appointed.

Korea Highway Corp (KHC) is a government agency that constructs expressways for the Ministry of Construction and Transportation. Back in 1999 it mandated Merrill Lynch for a debut dollar deal. However, the plan was quashed by the Ministry of Finance and the Economy (MOFE) at a time when Korea was about to re-gain investment grade status and it was on a mission to halt a flood of borrowers returning to the international markets. In KHC's case it also objected to the fact that the company's revenue base was entirely Won denominated.

KHC was, therefore, re-directed back to the domestic bond market, where it has since built up an extremely full yield curve out to seven-years. Its longest dated publicly quoted issue is a November 2010 issue, which carries a coupon of 6.03%.

The company's revenue base has typically been split equally between government investment and toll revenues on the one side and domestic bonds and loans on the other. As of December 2000 (its most recently published figures), the company had total liabilities of about $9.5 billion. Specialists say the total has now crept up to about $11 billion, equating to a debt to capitalisation ratio around the 60% level and debt to equity ratio of 100%.

"Over the next five years, there's potential and room for the company to virtually double its current debt load," says one observer. "The key thing it needs to monitor is its interest coverage ratio, which needs to be kept above the 1.3 times level."

Over the next three years, the company has said that it intends to maintain its current revenue mix as it seeks to increase national expressways under construction from 1,824KM in 1995 to 3,400 KM by 2006.

In terms of pricing, the key issue will be whether it gains the sovereign rating from the agencies. In its favour, the government is said to have no current plans to privatize the entity and maintains almost 100% ownership. According to the company's web site, the government holds an 82.6% stake, KDB a 13.2% stake, Kexim a 4.15% stake and Kookmin Bank a 0.05% stake.

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