Korea Midland completes debut dollar bond

Korean genco runs up against difficult market environment for investment grade credits.

Korea Midland Power (Komipo) completed its debut international bond deal yesterday (Tuesday) raising $150 million via joint bookrunners Credit Suisse First Boston and JPMorgan.

The seven-year 144a deal was priced in line with guidance and has an issue price of 98.256% and coupon of 4.95% to yield 5.25%. This equates to 125bp over Treasuries or 71bp over Libor. Fees total 25bp.

Pricing represents an 8bp premium to the secondary market trading level of Korea East West Power (Kewespo), which also completed its first dollar deal just over a week ago. Both credits are rated at the sovereign A3/A- country ceiling.

At the time of pricing, Kewespo's $250 million seven-year deal was trading at 117bp over Treasuries or 71bp over Libor. This in turn represents spread widening of 5bp from a launch price of 112bp over Treasuries or 69bp over Libor on April 15.

High-grade Asian spreads have been vulnerable to rising Treasury yields and neither of the two most recent Korean deals have performed well in the secondary market despite accumulating huge order books at launch.

Exactly one week ago, Kepco priced a $300 million 30 put 10 bond at 98.434% to yield 93bp over Treasuries or 49bp over Libor. Yesterday it was trading 7bp wider at 100bp over Treasuries.

In contrast to Kepco's $2.2 billion order book and Kewespo's $2 billion dollar order book, Komipo attracted demand of $250 million. And whereas Kewespo had 130 investors in its book, Komipo had 30.

The demand bubble for Korean deals would, therefore, appear to have burst and pricing for Komipo has had to be far more realistic than its two predecessors. Specialists say all global borrowers active in the market this week have been forced towards the wide end of guidance as issuers come to terms with rising Treasury yields and dampened investor demand. New issue premiums have also crept back in.

By leaving a few basis points on the table Komipo may have a more stable secondary market debut than Kewespo. Its pricing is also more in line with the existing genco curve. Although investors embraced Kewespo's pricing at launch, it came right through the genco curve and has subsequently widened where comparable credits have slightly tightened.

For example, Komipo has come only 3bp wider than Kowepco, which has a January 2008 bond outstanding at 68bp over Libor. This bond has tightened 6bp since Kewespo's deal. So too, Komipo has come 8bp tighter than Kospeco, which has a May 2013 bond outstanding. This has tightened from 82bp to 79bp since Kewespo's deal.

Allocations for Komipo's deal saw 65% of the deal placed in Asia, 26% in the US and 9% in Europe. By investor type, banks took 52%, insurance companies 30%, funds 16% and corporates 2%.

Because the book was tight, allocations were said to be fairly straightforward and there was an absence of momentum driven trading accounts. Those that participated were buy and hold investors.

Komipo is considered one of the strongest of the genco credits and has a debt to capitalization ratio of only 16% and debt to EBITDA ratio of 0.6 times. By comparison, Kewespo runs a debt to capitalization ratio of 36% and debt to EBITDA ratio of 2.3 times.

In its ratings release, Moody's highlighted the group's strong financial profile. It said that this will mitigate, "the risk of increased competition when the two-way bidding system is eventually introduced and vesting contracts gradually fall away."

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