South Korea is expected to price a five- and 10-year dual-tranche US dollar benchmark bond issue later today and analysts predict it will generate strong investor demand.
An e-mail from the lead managers said that pricing will take place in the New York morning today and that the shorter tranche will be reoffered at a spread of around 400bp over the five-year US Treasury yield, while the 10-year bonds will price at around 437.5bp over the equivalent Treasury note. The range for both tranches is plus or minus 12.5bp.
The lead managers are Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch and Korea's Samsung Securities.
The offering is likely to attract widespread investor interest. Brayan Lai, credit analyst at French investment bank Calyon, wrote in a note published yesterday that "the new issue premium looks reasonable [and that] pricing at these levels would see good juice in the secondary market".
At the indicated spreads, the five-year tranche would offer a yield pick-up of about 50bp over Korea's existing 2014 bonds, while the 10-year would offer 60bp over a theoretical 10-year bond, arrived at by interpolating the yield curve from its 2016 bonds. The new paper is indicated at 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.
By the close of trading in Hong Kong yesterday, the benchmark five-year US Treasury yield was 1.84% and the 10-year yield was at 2.88%, implying a yield of around 5.84% and 7.26% for the Korea five- and 10-year tranches respectively.
The issue will rank as senior, fixed-rate, SEC-registered global notes, and will be listed in Singapore. Sources familiar with the deal say the sovereign plans to raise as much as $2 billion from the sale -- the same amount sold by both Korea Development Bank (KDB) and Export-Import Bank of Korea (Kexim) in January. The sovereign 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 last year as borrowing costs soared after the collapse of Lehman Brothers.
In a statement yesterday, 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 won has fallen about 25% in the past year amid concerns about the level of Korea's external debt, which stands at $194 billion and is barely covered by about $200 billion of foreign exchange reserves. However, those 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 other international issues from Korean entities, especially banks.
Separately, the Korean government on Monday extended until the end of the year its $100 billion state-guarantee programme for overseas bond issues by domestic banks. The facility, which was set up last October, was due to finish in June. Banks will also be able to make bond sales with government-backing for tenors of up to five years, when previously they were restricted to three years.
Only Hana Bank, the country's fourth largest lender, has used the facility under the old rules, raising $1 billion through a three-year deal last week. Korean investors were not allowed to buy the Hana Bank bonds in the primary market, because the government was keen to maximise the amount of dollars entering the country's financial system -- this restriction has now ended.
Future bank deals, issued with a government-guarantee are likely to be offered at yields closer to the sovereign curve and below the state-policy banks, which only have implicit support from the government.