Korea Hydro prices debut international bond

State owned utility''s deal gets favourable reaction from investors.

Korea Hydro & Nuclear Power Co. (KHNP) made its debut foray into the international bond markets last night with a $200 million five-year Reg S issue. Deutsche Bank and JPMorgan acted as joint lead managers on the transaction, with Samsung Securities as co-manager.

With the A-/Baa2 rated group being positioned as the natural successor to Kepco, which has long provided corporate Korea's main pricing benchmark, all parties involved in the deal will be satisfied with pricing inside initial guidance and orders of $430 million.

The bonds priced at 99.679 on a nominal coupon of 4.25% to yield 4.332%. That equates to 139bp over five year treasuries and was inside the initial price talk of 140bp-145bp.

What will be of most interest to market observers however is that the deal priced tightly against Kepco's September 2007 bond and well inside Korea Western Power's (Kowepco) deal launched in December. As FinanceAsia went to press last night, Kepco was trading at 133bp over treasuries on the bid side, with Kowepco trading at 152bp.

KHNP has set its own benchmark now as it seeks to build a full yield curve. The ongoing privatization of the Korean electricity industry means that Kepco will soon become a transmission and distribution utility with small working capital requirements. Proceeds from the sale of its gencos will, therefore, be used to pay down debt as the company progressively moves into debt re-financing mode.

KHNP, on the other hand, has a heavy capex burden, with annual requirements of Won2 trillion ($1.68 billion) per annum. While most of this amount can be met from internal cash flow, some external funding will be needed as capex peaks over the coming five-year cycle and KHNP officials have said the company intends to build a full yield curve.

Unlike the other five gencos being spun out from Kepco, KHNP will never be privatized because of its strategic national importance. This means it has the same rating as Kepco, while the other five gencos are rated one notch lower by Standard & Poor's.

A syndicate official at one of the leads said that the continuing state-ownership of KHNP was a key factor in attracting investors. "This result reflects firstly on the job done by the issuer at the roadshows, but also the significant position KHNP holds in the wider Korean power sector," the official says. "The government ownership and unlikelihood of KHNP being privatized really contributed heavily to investor interest."

Although the deal was oversubscribed the issuer decided against upsizing the transaction. The transaction placed with between 35-40 investors, with 20% going to European buyers and the remainder selling into Asian accounts. Of this Korean investors bought 32%, 10% went to Japan with the remainder split between Hong Kong and Singapore.

Around 60% of the investors were banks, 18% insurance companies, 17% asset managers with private banks and retail investors accounting for the remaining 5%.

The world's sixth largest nuclear power generator, KHNP has also been shown to be one of the safest, with an unplanned shutdown rate of only 0.5 cases in 2001 compared to 1.4 in the US and 3.1 in France. The agencies have also said that the company has a strong financial profile. With debt totaling $7.098 billion as of April 2001, the company had a debt to capitalization ratio of 36%. Over the April to December period, it also registered net income of $217 million.

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