Hanjin International sold a $300 million three-year floating rate bond on Thursday, issuing it off the back of Korea Hydro’s recent offering and riding on the country’s safe haven status.
The Reg S-registered notes — guaranteed by state-owned Korea Export-Import Bank — priced 15bp to 20bp tighter than its closest comparables as investors were keen to hold instruments of the US-based subsidiary of Korean Air.
Floating rate notes are a small part of the fixed income world and are rare in Asia, although they are more common in the US. However, amid uncertainty over rising rates, more borrowers could wade into the floating rate space, say sources close to the deal.
As a result, Hanjin International, the US-based subsidiary of Korean Air, priced the offering 2bp tighter than its initial price guidance of around Libor plus 90bp area, according to a source familiar with the matter.
Most Federal Reserve officials expect to raise the benchmark interest rate some time next year. Traders see about 33% chance that the Fed will raise the rate by its July 2015 meeting, down from a 59% on September 18, Fed funds futures data compiled by Bloomberg show.
According to Dealogic data, Asia ex-Japan dollar, euro and yen-denominated floating rate note volume has reached $14.8 billion year-to-date, which is more than double last year’s volume of $6.6 billion during the same period.
Hanjin's latest bond offering comes amid a time when Korea Air is expanding its hospitality offerings. The country's largest airline plans to build the largest Intercontinental Hotel in North America.
The closest comparables for Hanjin’s note were Kexim’s outstanding 2017 floating rate notes, which were trading at a Z-spread of 55bp prior to announcement, said a source close to the deal. Fair value for the company's note would be around 65bp area, which translates to a guarantee premium of around 20bp-25bp.
The main comparable for the premium was Korean construction equipment maker Doosan Infracore's outstanding 2016 floating rate note — backed by Korea Development Bank — that was trading at a Z-spread of 97bp, versus KDB's existing 2017 floating rate note at 57bp. This indicates that the guaranteed premium should be around 40bp.
"The issuer priced the deal significantly under the KDB-Doosan premium," said a source familiar with the matter.
"This deal is a success in every sense of the word as investors got extra [premium] for the same Kexim [exposure] and the issuer managed to set a new benchmark for a quasi-sovereign bank guaranteed corporate bond from out of Korea."
Hanjin's bond received an order book of $600 million from 54 accounts, 76% of which went to Asian investors and the remainder to European investors.
Fund managers subscribed to 58% of the notes, followed by banks 30%, public sector 7%, insurance 3% and private banks 2%.
In spite of being rated a high single-A or even double-A, Korean credits have traditionally been bundled up with less-developed markets, meaning they take a hit whenever global emerging market funds cut positions.
But the pricing of some of the credits in recent days shows that this has changed. Amid current market volatility, non-Korean names — the likes of Hebei Iron & Steel and IDBI Bank — had to pay up unlike Korea Hydro and Nuclear Power, which managed to price its new offering flat to its curve on Tuesday.
Hebei Iron paid a new issue premium of 20bp for its $500 million three-year note, while IDBI Bank paid 9bp for its $350 million 5.5-year bond, both of which were issued on Monday.
All these factors serve as an ideal backdrop for bond issuance originating from South Korea. Next potential issuers in the pipeline could be Woori Bank and Korean conglomerate SK Group’s power and city gas arm, SK E&S, according to sources.
Barclays, Commerzbank, Deutsche Bank, HSBC, Nomura and Standard Chartered are the bookrunners of Woori’s potential dollar-denominated deal. Barclays, Citi, Goldman Sachs, JP Morgan and UBS are the bookrunners of SK E&S potential dollar offering.
BNP Paribas and HSBC are the joint bookrunners of Hanjin International's Aa3-rated transaction.