Korea pipeline halted by government, but KFB slips through

Korea First Bank takes advantage of an issuance window created by the government''s decision to halt offshore borrowing.

Korea First Bank (KFB) successfully completed a long-awaited subordinated debt issue yesterday (Wednesday) after quietly re-launching the $200 million deal via an accelerated bookbuild. The bank was able to take advantage of favourable issuance conditions because the Korean MoFE (Ministry of Finance & Economy) has decided to stop approving new issues because of concerns about the rising Won. As a result, prospective transactions for Kogas and the NACF are believed to have been postponed until later in the fourth quarter.

KFB was able to slip through, however, because it secured launch approval during the summer. As such it has found itself the beneficiary of an empty pipeline and none of the usual investor concerns about oversupply.

Back in mid-July KFB tried and failed to launch an upper tier 2 deal via Deutsche. UBS was then bought on board as a second bookrunner, but the deal struggled to re-gain momentum in a market where investors felt swamped by paper.

At the time, many also queried the rationale for an upper tier 2 deal when the bank had already raised $375 million from the same security only three months earlier. A number also baulked at a Reg S offering, when the original had been 144a.

This time round, the bank has opted for lower tier 2 funding to differentiate itself and is now full on tier 2 debt for the year. UBS gained sole control of the deal after building a concentrated book based on reverse enquiry demand.

Pricing of the 10 non-call five issue came at 99.505% on a coupon of 6.25% to yield 6.367%. This equates to 323bp over Treasuries, or 285bp over Libor. Fees total 68.75bp.

Relative to the bank's own upper tier 2 deal, pricing of the Ba1/BBB-/BBB (Fitch) rated deal is said to be fair. Relative to other Korean comparables, however, it looks to have plenty of upside potential and this is perhaps a reflection of the fact that the original deal has always traded wide.

KFB's 2013 deal callable in March 2008 is currently trading to yield 6.27% or 288bp over Libor. The seven-month differential between the old and new deal is said to be worth about 15bp. Between lower and upper tier 2 debt there is typically a 10bp to 30bp differential.

So on a like-for-like basis, the new deal has come about 18bp through the old - a fair differential given its lesser subordination.

The two best comparables cited by FIG experts are Woori and Koram, both of which have issued lower tier 2 debt this year. Koram is probably the best comparable as it shares a very similar credit profile to KFB.

Both have the same Ba1 sub debt rating from Moody's, though Koram is not rated by S&P. Both are foreign-owned domestic banks: KFB by Newbridge Capital and Koram by the Carlyle group. Both have similar assets sizes: $32 billion for KFB and $36 billion for Koram.

Koram's $165 million 4.68% 2013 deal callable in June 2008 is currently trading at about 223bp over Libor. This represents a 62bp differential to KFB.

In July, Woori also launched a lower tier 2 deal with a Baa3/BB+ rating. The 4.875% deal is currently said to be trading around 225bp over Libor, a similar differential of 60bp.

Bankers say the main reason for the difference is the trading pattern of KFB's original upper tier 2 deal, which was launched into very difficult market conditions in early March. At the time North Korean MIGs were chasing US spy planes and the sovereign decided to put its own deal on hold.

Issuance conditions for KFBs new deal could hardly be better and success may now create a platform for both deals to tighten. The lack of supply has not only allowed a tainted transaction to clear the primary market quite smoothly, but should ensure plenty of follow-on demand in the secondary.

Adding to this, the Won/dollar basis swap has tightened quite sharply over the last two days, creating a groundswell of demand from onshore accounts.

The final order book is said to have closed just over two times covered with participation from 33 investors. By geography, Asia accounted for 34%, Korea 26% and Europe 40%. By investor type, asset managers took 64%, banks 30% and private banks 6%.

Observers say the deal was driven by a core group of institutional accounts, which have been impressed by KFB's improving credit fundamentals. Indeed the deal was driven by the need to bolster the bank's CAR because of a rapidly expanding loan book.

The bank's loan portfolio grew by 25% in the first half compared to a 10% industry average and it is forecasting similar growth for the second half. Profitability, on the other hand, has been impacted by a 273% increase in provisioning against credit card delinquencies.

The bank reported a first half net loss of Won49.9 billion compared to a Won52.8 billion net profit the previous year. But showing signs of a turnaround, the second quarter did show a net profit of Won14 billion against a first quarter loss of Won64 billion.

As of end June, total CAR stood at 10.92% versus 11.6% in December.

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