Korean banks rush to tap bond markets

Dollar bond issues by Hana Bank and Industrial Bank of Korea are likely to take advantage of government-issued foreign currency payment guarantees.

Two Korean lenders, Hana Bank and Industrial Bank of Korea (IBK), are planning to issue US dollar bonds in the near future, and are likely to make use of state-backing in order to reduce their funding costs.

Hana Bank, Korea's fourth biggest lender, said in an email to local media that it might issue $500 million in three-year global bonds backed by a government guarantee. It will be the first Korean bank to use the facility, for which it will have to pay a fee.

In October, the government announced a package of foreign currency payment guarantees for domestic banks worth $100 billion to help stabilise the volatile financial markets and then said it would guarantee the payment of all foreign currency loans raised by Korean lenders abroad until June this year for up to three years. But, a memorandum of understanding (MOU) signed late last year attached a quid pro quo which put many borrowers off. According to the MOU, the government could intrude on a bank's autonomy if it made use of that guarantee.

Hence, the response has been rather different to that of banks elsewhere in the world which have been offered similar national treasury support: not a single Korean lender has issued bonds abroad with state guarantees.

But recently, the Korean authorities have back-tracked to some extent, and assured its domestic banks that they would retain full managerial and operational independence. In part, a more conciliatory approach has been adopted in order to get the banks' support for the government's W20 trillion ($13 billion) recapitalisation fund, launched in mid-February.

Hana Bank, a unit of Hana Financial Group, has instructed Barclays Capital, Citigroup, Credit Suisse, Goldman Sachs, HSBC, JPMorgan, and the financial group's own broking arm, Hana Daetoo, to underwrite the deal. (We note it might have taken less space to list those international banks not involved.) The size, structure and timing of the deal have not been finalised, according to a banker involved in the transaction.

Korean banks are likely to be keen issuers of dollar bonds this year, with several facing refinancing pressures. State-owned IBK is planning to raise between $500 million and $1 billion, and has appointed Citigroup and Merrill Lynch to organise an international roadshow, according to a Reuters report on Friday.

IBK, which is rated A by Standard & Poor's, A2 by Moody's and A-plus by Fitch, is due to buy back $300 million of subordinated bonds at a call date in May.

In early February, Woori, Korea's second biggest bank, upset investors when it decided not to call $400 million of lower tier-2 bonds maturing in 2014, making it the first Asian bank not to redeem its subordinated debt early. In contrast, Shinhan, the country's third largest lender, reassured investors by saying that it would exercise its call option on $400 million of its subordinated debt.

In January, state-run Korea Development Bank and Export-Import Bank of Korea each raised $2 billion in five-year bonds, eschewing an explicit state-guarantee, but they had to pay hefty spread premiums of around 650 basis points over US treasury yields.

And the good news is that Korea's external debt is falling. At the end of February, the Bank of Korea reported that the country's short-term (payable within a year or less) external debt had dropped by $38.5 billion to $151.1 billion in December from a quarter before. The country's foreign reserves totalled $201.74 billion at the end of January, and current liabilities now make up 96.4% of foreign reserves, compared with 97% a year earlier.

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