Korea Resources returned to the international bond markets with a $500 million deal on Monday, almost one year after its last outing.
The quasi-sovereign borrower sized its five-year Reg S deal at the higher end of expectations for $300 million to $500 million.
In doing so, it took advantage of a relatively strong order book compared to recent precedent and slightly firmer market conditions, with investment grade spreads tightening 1bp to 2bp over the course of the Asian trading day.
It probably helped that the deal appeared to offer good value in comparison to most Asian primary market deals, whose issuers consider it an achievement to price through their secondary market curve rather than create goodwill among their investor base.
By the time of final guidance, the syndicate had built up a $2.75 billion order book compared to the $1.6 billion book Korea National Oil Corp (KNOC) achieved for the five-year tranche of its twin $1 billion transaction last week.
Syndicate bankers said there was little drop-off after guidance was revised from 135bp over Treasuries to between 110bp over and 115bp over, with the book closing at $2.5 billion. Final pricing was fixed at 99.906% on a coupon of 2.25% to yield 2.27% or 110bp over.
A total of 195 accounts participated with a split of 86% Asia and 14% Europe. By investor type asset managers picked up 64%, banks 19%, insurers 7%, private banks 6% and central banks 4%.
Brokers were divided where fair value for the new deal lay. In their sales notes, some houses suggested the deal should trade flat to KNOC since investors expect the government to provide indiscriminate support to its state-owned proxies.
Korea Resources is wholly owned by the government, which has provided capital injections every year since 2011.
On this basis, the new deal offers a 13bp pick-up based on the KNOC's G-spread of 96bp on Monday. Its $500 million five-year tranche priced last Tuesday at 99.929% on a coupon of 2.125% to yield 95bp over Treasuries.
Other houses suggested a 5bp pick-up to KNOC is more realistic given that Korea Resources is not only weaker on a stand-alone basis but also has negative momentum after Moody's put its Aa2 rating on review for downgrade in mid-March. On this basis, the new deal offers an 8bp pick up.
However, syndicate bankers said fair value lies around the 108bp level, suggesting a much slimmer 2bp new issue premium.
"Investors made it very clear the deal needed to price above this level given the one notch lower S&P rating and Moody's likely ratings action," one syndicate banker said.
Syndicate bankers also said they spotted Korea Resources' existing $350 million 2.25% April 2020 bond at a G-spread of 103bp on Monday. Given that its $500 million 2.125% May 2018 bond was trading around 10bp tighter, this suggests the need for at least 5bp curve extension out to 2021.
Korea Resources currently has an Aa2/+ credit rating compared to KNOC's Aa2/AA- rating. Without sovereign support it has a stand-alone credit profile of B3/BB- compared to KNOC's B1/B3 rating.
The group is tasked with securing a stable supply of strategic mineral resources including coal, uranium, copper, iron and zinc. Moody's said it was putting the credit's rating on review for downgrade because of falling commodity prices.
It said the review reflected its "expectation that Korea Resources policy roles will be less comparable with the other rated core GRIs in Korea over the next two to three years, given its shrinking asset base and reductions in new investments".
S&P is slightly more positive. In a ratings note to coincide with the bond issue, it wrote "we assume the company will cut its capital spending and sell stakes in some overseas mining assets, in line with its proposal to the government to improve its financial strength, which should temper further deterioration in the company's credit metrics."
In 2015, the company reported a net loss of Won2.1 trillion ($1.8 billion) on the back of Won1.8 trillion in impairment charges. Late last year, S&P estimated its 2015 funds from operations (FFO) to debt at minus 0.5.
This story has been updated to include final deal stats.