Korea kicks off sovereign bond supply

As Indonesia and the Philippines eye dollar deals, Korea shows how it's done.

Asian sovereigns are lining up to tap the bond markets. Indonesia is talking to banks about a dollar sukuk, and is plotting euro and yen bonds later in the year. The Philippines has had discussions with bankers about its own dollar return.

But it was South Korea — a rare issuer by Asian sovereign standards — that started the ball rolling this year, selling a $1 billion 10-year deal. The success of the transaction is a good omen for other governments eyeing their own deals.

The Aa2/AA/AA- rated sovereign borrower took advantage of buoyant market conditions this week, as investors look to top up their bond portfolios after protecting their profits at the end of last year. Like a host of other issuers this week, the sovereign managed to close a deal that was both tightly-priced and traded well in the secondary market.

Bankers working on the SEC-registered bond first approached investors with guidance at 70bp to 75bp over the 10-year US Treasuries, but were able to slash pricing dramatically from that initial level. Final guidance was set at between 55bp and 60bp over Treasuries, and the deal ended up pricing at the tight end of guidance.

The 55bp spread was around 5bp inside fair value, said an analyst away from the deal. He based that on Korea’s existing 5.625% November 2025 bond, as well as using a pair of deals from the Export-Import Bank of Korea as comparables.

But despite the aggressive pricing, the bond traded tighter in the secondary market, being quoted at a cash price of 98.926/99.027 for a spread of 52bp/51bp on Friday afternoon.

Bankers are now plotting a host of deals — including those potential sovereign bonds — before Chinese New Year scuppers liquidity at the end of this month.

“We expect to see at least 15 deals from a range of corporate and sovereign borrowers before Chinese New Year,” a syndicate banker told FinanceAsia.

The final orderbook reached $1.4 billion from 70 accounts. By geography, Asian accounts took 54%, US investors were allocated 25% and European buyers took 21%. By investor type, fund managers and insurers each took 37%, banks 19%, public sector accounts 3%, private banks 2% and pension funds 2%.

Korea saw a $1 billion 10-year bond mature in December last year, according to Dealogic. Its next dollar maturity will not come until April 2019.

The bookrunners of the bond were Bank of America Merrill LynchCitiGoldman SachsHSBCJP Morgan, The Korea Development Bank, and Samsung Securities.


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