South Korea discovered yesterday that giving a little can elicit unexpected rewards. By conceding on pricing, it managed to raise one-and-half times more cash than it initially intended.
Korea raised $3 billion with an issue of senior, fixed-rate, SEC-registered, dual-tranche global notes, priced bang in the middle of the early price guidance. The issue was split equally, with $1.5 billion each for the five- and 10-year tranches. The republic had originally planned for a $2 billion issue, so it must have been pleasantly surprised.
And that's despite mandating half-a-dozen banks to arrange its first bond deal since November 2006. Korea's decision provoked the inevitable competition and -- well -- inter-firm back-stabbing, bitching and concomitant ingratiating to the borrower that such a diffuse spreading of responsibility can inflame. The cooperating lead managers for the deal are Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch and Korea's Samsung Securities.
The five-year notes pay a semi-annual coupon of 5.75% and were priced at 99.512 to yield 5.8864%, or 400bp over the five-year US Treasury benchmark; and the 10-year comes with a semi-annual coupon of 7.125%, and was priced at 99.052 to yield 7.26%, or 437.5bp over the 10-year US Treasury yield.
The offering was always likely to attract strong investor interest. Brayan Lai, credit analyst at French investment bank Calyon, wrote in a note published on Tuesday, that "the new issue premium looks reasonable [and that] pricing at these levels would see good juice in the secondary market".
At the beginning of the week, an email from the lead managers said that the shorter-dated tranche would be reoffered at a range of 387.5bp-412.5bp over the five-year US Treasury yield, and the 10-year bonds at 425bp-450bp. In the end, they were priced in the middle of their ranges, confirmed by another email from Merrill Lynch on Wednesday.
The five-year tranche offered a yield pick-up of about 50bp over Korea's existing 2014 bonds and 60bp over a theoretical 10-year bond, when the yield curve is interpolated from its 2016 bonds. The new 2019 bonds priced approximately 180bp over the 2016 bonds. Lai expects the new and old five-year issues to converge closer in spread, while "fair value for the 10-year tranche should be in the mid-7% yield range", or even lower since Korea's credit default swap yield curve has been flattening recently.
According to one of the bookrunners, 40% of the five-year tranche was placed in Asia, 32% in Europe and the remaining 28% in the US. US investors, consisting mostly of real money accounts, also took 62% of the 10-year tranche, while Asian accounts bought 23% and Europeans 15%. Fund managers bought 45% of the five-year issue, banks (including central banks) took 30%, insurance companies and pension funds 12% and others took the balance. Real money accounts were even more enthusiastic buyers of the 10-year tranche, taking 70%, while insurance companies and pension funds bought 15%.
The issue will be listed in Singapore. It is rated A2 by Moody's Investors Service, single-A by Standard & Poor's and A+ by Fitch Ratings.
Korea last sold global bonds in November 2006, when it raised $500 million from its 2016 issue, at a spread of just 70bp over the US Treasury yield. It aborted plans to launch a $1 billion issue in September, when borrowing costs soared after the collapse of Lehman Brothers.
In a statement on Tuesday, the Ministry of Strategy and Finance said that the proceeds from the bond sale will be used to smooth volatility in the currency market. The Korean won has fallen about 25% in the past year amid concerns about Korea's external debt of $194 billion, which is barely covered by about $200 billion of foreign exchange reserves. However, worries have been partly alleviated by recent currency swap arrangements made with China, Japan and the US.
The bonds will also provide a benchmark for pricing international issues from other Korean entities, especially banks.
On a relative basis, recent Asian bond issues have performed staggeringly well and sovereign issues in the region have been great performers for investors who have switched out of US Treasury bonds. After all, it is very much a lenders' market. Countries throughout the world are struggling to fund recession-beating spending programmes, and are also providing state-backing for bond issues by their domestic banks in order to inject liquidity and credit to desiccated companies.
The $1 billion five-year tranche that was part of the $3 billion dual-tranche bond issued by Indonesia in February at a spread of 850bp over the equivalent US Treasury yield, was bid at 710bp at the close of business in Hong Kong yesterday. The 10-year Philippines deal launched a month earlier at 600bp over the Treasury benchmark yield, is currently bid at 602bp.
Korean policy bank issues, which enjoying implicit government support, have also performed spectacularly. In January, Korea Development Bank issued $2 billion of five-year US dollar bonds at a yield spread of 675bp over the US Treasury yield and Export-Import Bank of Korea closely followed with the same size and tenor at 678bp; they are now bid at 530bp and 535bp respectively, according to one of the lead managers for the Korea sovereign transaction.
Posco, Korea's biggest steel maker, raised $750 million last month with a five-year bond at 737bp over US Treasury yields, which at the close of business (HK time) yesterday was bid at 605bp. Even Hana Bank, Korea's fourth largest lender which priced a $1 billion three-year bond last Thursday, has already seen its three-year deal tighten from 543bp to 495bp.
Hana is, of course, the real benchmark for any investor interested in Korean credit. Its issue was supported by a government guarantee, and on Monday the Bank of Korea said that its $100 billion state-guarantee programme for overseas bond issues by domestic banks will be extended until the end of the year. The facility, which was set up last October, was originally due to finish in June. From now on, banks will also be allowed to make bond sales with government-backing for tenors up to five years, when previously they were restricted to three years.
So more Korean bank issues are expected, and they will probably pay yield premiums over the sovereign curve to compensate for time delays, which might follow any default on payments. In any case, investors are sure to insist on that -- because they can.