Korea National Oil prices as Asian credit slides

Korean quasi sovereign oil group completes dollar bond in seesawing markets, while HSBC and Bank of China HK ready the first panda bonds by financial institutions.
Credit slides as markets turn on their head
Credit slides as markets turn on their head

Korea National Oil Corporation (Koroil) completed its first dollar bond of 2015 on Tuesday, raising $600 million from a 10-year 144a deal that was timed to take advantage of Korea's recent sovereign upgrade.

The Aa3/AA-/AA- rated deal launched on what appeared to be a relatively good day for Asian credit but conditions turned increasingly sour as the Asian trading day progressed and, by the time the deal priced around lunchtime New York time, markets had become extremely volatile.

Equities markets fell across Europe and the US, while the previous day's sell-off in rates reversed itself as benchmark 10-year Treasury yields tightened 7bp to 2.13% at the New York close, their lowest level since early September.

"Koroil had built up a relatively strong book," said one banker. "But unfortunately the US open was weak, the US Treasury market was extremely choppy and Europe was trending weaker."

The final order book closed around the $1.7 billion level, which represented only a slight drop off from the $1.8 billion level it hit when price guidance was revised from 130bp over Treasuries to 115bp-120bp over.

Final pricing was fixed at 99.653% on a coupon of 3.25% to yield 3.291% or 115bp over Treasuries. A total of 115 accounts participated of which 88% were from Asia, 9% from Europe and 3% from the US. By investor type, insurers/pension funds took 56%, fund managers 25%, banks 18% and private banks 1%.

The nearest comparable is Koroil's own $550 million 3.25% July 2024 bond, which was trading on Tuesday at 101bp over Treasuries and a G-spread of 109bp. This means the new bond has offered a 6bp pick-up for a 15-month maturity extension.

The second closest comparable is a $500 million 3.5% July 2025 bond deal by Korea Gas, which has a one notch lower rating from Standard & Poor's and Fitch. This was trading on Tuesday at 100bp over Treasuries and 97bp over on a G-spread basis. 

Mizuho credit analyst Mark Reade noted that the 2024 to 2025 curve for quasi-sovereign Korean credits is flat on a yield-to-maturity basis and inverted on a G-spread basis because of strong buying from yield-focused domestic investors.

"Although we feel slightly uncomfortable recommending Koroil 2025 inside Koroil 24 on a G-spread basis, such is the current strong technical bid for 10-year Korean US dollar cash that if today's deal priced at 105bp over Treasuries or better, we still think it will squeeze tighter in secondary," he wrote in a note to investors.

In its investor presentation, Koroil noted that it has the full complement of sovereign ratings compared to some of its quasi-sovereign peers. Last week, Standard & Poor's upgraded the sovereign to AA- on stable outlook, concluding that it had a better growth outlook than most developed economies over the next three to five years. 

The upstream exploration and production company is wholly owned by the government and strategically important to its energy needs as the country tries to increase its self-sufficiency ratio from 13.6% in 2013 to a targeted 25% in 2022.

Korea is the world's eighth largest oil consumer but also its fifth largest oil importer because of the country's relative lack of strategic reserves and oil fields. At the end of the first half, 2P reserves stood at 1,352 million barrels of oil equivalent. It has a stockpile of 116 days without imports, higher than the US on 101 days. 

Koroil's investor presentation also flagged total debt of $12.479 billion compared to first half Ebitda of $597 million. It recorded an interim net loss of $269 million.

Joint bookrunners for the bond deal were Barclays, Citi, Goldman Sachs, HSBC, KDB and UBS.


The People's Bank of China (PBOC) also announced on Tuesday that it has approved panda bond issues by HSBC and Bank of China Hong Kong.

The two deals, which are expected to launch before the end of the month, will be the first by overseas financial institutions in China's domestic bond market. HSBC has won approval to raise Rmb1 billion ($157 million) and Bank of China Hong Kong to raise Rmb 10 billion ($1.57 billion).

The PBOC said the move represented a significant step forward for the domestic bond market as the government tries to broaden financing channels. Despite the fact that China's $6 trillion domestic bond market is now the world's third largest in absolute terms, it is still very small as a percentage of GDP - just 1%. 

Foreign issuers have long clamoured to gain greater access and HSBC is likely to be particularly pleased to have been given the green light over rival Standard Chartered, which was not in the first batch of approvals. For the bank's Greater China chief executive Helen Wong it also marks something of a return to her roots since she began her career as HSBC's head of China DCM.

Issuance from international borrowers has been extremely sparse since multilaterals including the Asian Development Bank (ADB) and International Finance Corp (IFC) launched their first and only deals in the mid-noughties. Last week IFC global funding head Ben Powell told FinanceAsia that the supranational is keen to become a fairly regular issuer as soon as the PBOC allows.

The only other recent issuer has been Daimler, which raised Rmb500 million early in 2014, the market's first corporate deal. 

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media