Korea Southern debuts in dollars

A third genco accesses the international markets but has to rely on the Korean bid to secure completion.

Joint leads ABN AMRO and Deutsche Bank priced a $150 million Reg S bond for Korea Southern Power (Kospo) on Friday. Timing of the deal was unfortunate, hitting renewed jitters on the Korean peninsula head on following the launch of test missiles and re-activation of a nuclear plant in the North.

However, a decision to continue was taken late in the week after spreads appeared to stabilise and Korean demand held up. Nevertheless, pricing had to come at the outer end of the pre-marketed range, with the five-year bond priced at 99.622% on a coupon of 4.25% to yield 4.355% or 160bp over Treasuries.

Relative to comparables, pricing seems wide on a Treasuries basis, but much of the premium can be attributed to the steepness of the Treasury curve between four and five years. On a Libor basis, it seems more reasonable. At the time or pricing, for example, Kepco's September 2007 bond was bid at 138bp over Treasuries or 114bp over Libor, while Korea Hydro's January 2008 bond was also bid at 114bp over Libor, but 153bp over Treasuries.

Kowepco, the first of the gencos to access the market late last December, also has a January 2008 bond bid at 153bp over Treasuries, or 121bp over Libor. On a Libor basis, Kospo managed to come 1bp inside this at 120bp over.

Similar to Kowepco, there were a small number of investors in the final book, which closed at the $180 million level. A total of 25 accounts participated, of which 60% came from Korea, 25% Asia and 15% Europe.

Commenting on the deal, one banker says, "There was quite a bit of international demand, but at the end of the day it was clear that the least price sensitive investors were the Koreans. They've seen all this before with North Korea and it just doesn't affect them as much."

And while Kospo was undoubtedly a difficult deal, the company can take some comfort from securing cost effective funding as a result of a more favourable interest rate environment. With a headline coupon of 4.25% it has not only priced its deal at the same level as both Korea Hydro and Kepco, but inside Kowepco, whose transaction carries a coupon of 4.625%.

Kospo is the second smallest of the six gencos in terms of capacity (MW5765), but one of the most efficient. It operates an efficiency ratio of 41.9% compared to a 39% to 40.8% range for its peers and a utilization ratio of 72.7% compared to 52.7% to 63.5%.

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