The Republic of Korea saw massive demand last week for its $1.45 billion dual-currency bond and, reflecting the liquidity in the market, became the first non-European issuer to price with a negative yield.
Investors flooded in for the SEC-registered $625 million 10-year paper and €700 million ($825 million) five-year bonds, indeed final books hit $3.6 billion for the US dollar tranche and €5.5 billion for the euro piece.
This allowed the deal to be upsized from an original $500 million and €500 million, but a $1.5 billion cap from the Korean government meant that it could not be increased any further.
“The main hurdle with this transaction was never going to be whether we could do the deal or not, it was really around the very modest requirements,” said a banker on the deal speaking to FinanceAsia.
BNP Paribas, Bank of America, Citigroup, JP Morgan, Mirae Asset Daewoo and Standard Chartered were able to squeeze the pricing, despite the fact that markets were hair-raising at the time. The bond priced at the end of a three-day sell-off in the equity markets.
“If you look at the volatility, it is very much ringfenced to tech. The movements were quite high but were concentrated in stocks which don’t have much to do with Korea. US tech volatility is not having any impact on dollar credit, whether in Asia or the US,” the banker said.
The 1% US dollar tranche came in 40bp from guidance and priced at 98.139 to yield 1.198% or US Treasuries plus 50 basis points (bp). The 0% euro tranche came in 25bp from guidance to price at 100.296 to yield –0.059%, or mid-swaps plus 35bp.
Not only did pricing come in from guidance, both tranches priced around 10bp inside their respective curves.
Even with the tight pricing, the demand isn't a surprise, especially for an investment grade sovereign. The issue has an expected rating of Aa2/AA/AA-. "With US interest rates at near zero, investors have been looking elsewhere for any kind of yield," said the Asia Pacific head of fixed income at an investment management company in Hong Kong.
DEBATE ON TENOR
The decision for a two-currency structure was deliberate, though it was not made on the basis of the swap (“A sovereign is not really hunting for the last basis point,” the banker said), rather it was about visibility.
“The case of maintaining a presence in both of the larger currency markets superseded the case of providing all that liquidity to one or the other,” he said.
Where there had been debate was on tenor. With the euro tranche, there was some debate about whether the issue should go for five or six years, but the attraction of the negative yield for the five-year clinched the tenor. With the US dollar tranche, bankers were enthusiastic about an ultra-long issue as has been seen with other sovereigns in Asia.
In mid-April, Republic of Indonesia sold a $4.3 billion three-tranche bond with Asia’s first 50-year piece. And a month later, Republic of the Philippines sold a $2.35 billion double-tranche 10-year and 25-year bond.
But Korea's Ministry of Economy and Finance resisted. "The overarching priority was to set a point in the curve which would benefit Korea Inc,” said the banker. “Having a sovereign benchmark on that part of the curve where everyone else funds, makes a tonne of sense because you can bring your curve down or set a floor.”
This was explicitly confirmed by the ministry. “The issuance of FX stabilisation bonds at the lowest yield ever is expected to contribute to pushing down the overall yield curve of the Korean sovereign bonds, as well as to lowering international debt financing costs for other Korean borrowers in the private sector by providing a lower benchmark secondary rate,” it said in a statement.
Proof positive that this was the right policy has already been seen. Earlier this week, Export-Import Bank of Korea (Kexim) on Monday sold a $1.5 billion three tranche bond: $400 million five-year paper at US Treasuries plus 50bp, $500 million 10-year paper at US Treasuries plus 65bp, and a €500 million three-year social bond at mid-swaps plus 35bp.
Republic of Korea’s bonds were bought significantly by real money managers, especially by central banks and sovereign wealth funds. Although European investors took a significant portion of the US tranche as well as 90% of the euro tranche, not too much should read into that, even if the banks on the deal did spend particular time talking to European investors ahead of the deal.
“Once you get to levels of oversubscription which are so high if you have a $50 million allocation in Region A, that is close to 10% of the deal itself,” explained the banker.
In the secondary market, both tranches tightened slightly. The US tranche was seen 6bp tighter and the euro tranche was 5bp tighter.