Korea may sell $5 billion of foreign bonds in 2009

Korea intends to launch its biggest offer of foreign currency-denominated bonds since 1998, once its currency stabilises.
South Korea plans to sell up to $5 billion in foreign-currency denominated bonds next year, its biggest offering since 1998. A Korean official was quoted as saying that the government intends to stabilise the countryÆs currency before launching the foreign currency-denominated bonds. The Korean won has been the most volatile Asian currency so far this year.

The government official said the foreign bond sale plan is in the government's 2009 budget proposal, but it hasnÆt decided on details like whether to issue in US dollars, euros or other global currencies.

The news comes after Korea postponed a $1 billion US-dollar denominated 10-year sovereign issue in September after the collapse of Lehman Brothers sent the money markets into a tail spin. Marketing of the bond was already under way when the decision to postpone was taken. Lehman was one of the arrangers of the postponed bond, together with Barclays Capital, Citi, Goldman Sachs, Samsung Securities and UBS.

Once they do come, DCM bankers say the Korean sovereign bonds may trigger a spate of quasi-government bond issues, followed by corporates and banks coming to the market to raise debt. ôKorean corporates need to recapitalise soon and you will see a spate of issues once the market gives a semblance of returning to normalcy,ö one Singapore-based banker says.

A second banker says that the market is expecting banks to raise debt by early next year, when there is less volatility in the money markets.

The $5 billion worth of foreign-currency bonds is part of a planned debt issuance of $12 billion next year for the government's so-called currency stabilisation fund, the government official said. He said money in the stabilisation fund is used, when necessary, to keep the won from rising or falling too fast.

South Korea's foreign-currency reserves fell in each of the past six months this year, dropping by a combined $24.6 billion to $239.7 billion as policymakers intervened to stem a slide in the won.

The nation has been building up its reserves since the Asian financial crisis led to the won halving in value in 1997. The government had to turn to the International Monetary Fund for a $57 billion loan at the time to help repay overseas debt.

Korea also announced on Sunday that it will guarantee $100 billion worth of foreign debt held by Korean banks and pump $30 billion into its banking system.

Meanwhile, Moody's Investors Service and Standard & Poor's both have a stable outlook on Korea's foreign currency ratings.

"The stable ratings outlook is premised on the ability of the authorities to manage the country's vulnerability to the global financial market crisis and avoid a deep and sustained deterioration in relative credit metrics,ö says Tom Byrne, a senior vice-president and Asia-Middle East regional credit officer with Moody's sovereign risk group, which has an A2 rating on the countryÆs local and foreign currency government bonds.

"The ratings are supported by Korea's high economic resiliency but are tempered by a mid-range, rather than low, susceptibility to event risk," Byrne says in a press release. "Additional support comes from the economic and financial restructuring of the past decade and the accompaniment of a prudent fiscal stance and relatively strong government balance sheet," he adds.

The new Moody's report shows that although risks are present and the Korean banking system has relatively high vulnerability to the global credit crisis, Korea is much better positioned to weather the current crisis than that of 1997.

"While there is severe pressure on the ability of Korean banks, as there are in other banking systems globally, to roll over their external funding requirements, our assessment is that the government still has the resources to provide dollar liquidity to domestic banks, despite an ebbing in the Bank of Korea's foreign exchange assets from an historical high of $264 billion earlier this year," says Byrne.

"At the same time, the unprecedented turmoil in the global financial system makes seeing through this exceptional crisis, let alone the expected downturn in the economic cycle, very difficult," he adds.

Standard & Poor's also affirmed its foreign and local-currency long-term sovereign credit ratings on the Republic of Korea last week at A and A+, respectively. At the same time, S&P affirmed its foreign and local-currency short-term credit ratings on Korea at A-1. The outlook on the long-term ratings is stable.

ôThe sovereign credit ratings on Korea are supported by its dynamic economy, sound fiscal position, and sound external position,ö says credit analyst Kim Eng Tan of the S&P sovereign ratings group.
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