Korean credits dominate Asian issuance

Quasi sovereigns KDB and Korea Southern Power return to the international bond market.

In a busy day for Korean borrowers yesterday (Tuesday), KDB issued its second five-year deal of the year and Korea Southern Power (Kospo) further extended the maturity profile of the genco sector with a 10-year offering.

KDB's issue was particularly noteworthy, since it represents the first $1 billion single tranche transaction by any Korean entity outside the sovereign in over a decade. There has only ever been one other non-sovereign issue of this size before: for Kepco back in 1993.

Maximising proceeds made sense in the context of a new issue market, which is expected to become far more hostile and expensive in the autumn months. And KDB is likely to judge the issue a success, since it managed to avoid paying a significant new issue premium after choosing an intermediate tenor, which appealed to all three time zones.

With Credit Suisse First Boston as global co-ordinator and Barclays and HSBC as bookrunners, the $1 billion offering was priced at 99.683% on a coupon of 4.75% to yield 4.822%. This equated to 115bp over Treasuries and 64.5bp over Libor. Fees were 15bp.

KDB's outstanding five-year deal due March 2009 was bid at 106bp over Treasuries or 65bp over Libor at the time of pricing. Supply pressures had pushed it out 8bp in the week ahead of pricing. Kexim's February 2009 bond was also said to be trading around the 106bp level, equating to about 65.5bp over Libor.

Bankers say KDB was able to price through the March 2009 bond on both a Libor and Treasuries basis. Where the former is concerned, the Libor curve is fairly flat between March and July. However, the Treasury curve is steep.

"There's about 15bp on the Treasury curve between March and July, whereas KDB has only offered 9bp between the two bonds," says one specialist.

One of the reasons it was able to achieve this stems from the differential between the coupons on the two bonds. Back in March, KDB only offered investors 3.875%. Come July, it is paying 88bp more, pricing the new deal at 4.75%.

The order book is said to have closed around the $2 billion mark, with participation from about 125 accounts. Unusually for a five-year deal, US investors dominated, taking 43% of the total. Asia took a further 34% and Europe the remaining 23%.

The Asian book further split: Singapore 41%, Korea 23%, Hong Kong 21%, Japan 13% and other Asia 9%. By investor type, funds took 47%, banks 37%, insurance companies 12% and retail 4%.

Bankers say the intermediate maturity was a smart move. As one comments, "Virtually all of the issuance from Asia in the immediate pipeline is in the 10-year sector - PTT, Chexim, the Hong Kong sovereign, CDB.

"But five years is the sweet spot of the market at the moment," he adds. "It always appeals to Asian accounts, but US investors also favour it now because they're looking to put on carry trades over the summer and five-years is less volatile than 10 years."

Slightly earlier in the day, Kospo returned to the US dollar market raising $150 million from a 10-year deal. The A3/A- rated transaction marks the genco's second foray to the offshore bond market following a debut $150 million issue in March 2003.

With ABN AMRO and Barclays as lead managers, the Reg S issue was priced at 99.221% on a coupon of 5.75% to yield 5.854%. This equated to 138bp over Treasuries and 85.5bp over Libor.

Kospo has a 4.25% March 2008 bond outstanding, which was yielding about 75bp over Libor. On a like-for-like basis, observers say the new deal came flat.

The other two most comparable benchmarks are a 5.125% April 2034 bond for Kepco, puttable in 2014 and a 4.75% June 2013 bond for Korea South East Power, the only other genco to raise 10-year funds.

Bankers say Kepco's 10-year deal was trading around 124bp over Treasuries at the time Kospo priced. Given the curve is worth about 3bp to 4bp, Kospo has priced at a premium of roughly 11bp.

Korea South East Power was said to be trading around 90bp over Libor. Here bankers estimate the curve to be worth about 4bp, meaning Kospo has priced flat to its predecessor on a like-for-like basis.

Like many recent Asian deals, the order book was very concentrated. Books are said to have closed two-and-a-half times covered with allocations to just 21 accounts.

Pricing was aided by a large back-stop bid from Korea, which took 70% of the deal, with 16% going to Europe and 14% to non-Korea Asia. The majority of the Korean book went to domestic insurance and pension funds.

"They're buy and hold investors so they're not really concerned about liquidity," says one banker. "A safe low beta name like Kospo is just what they were looking for."

Pricing suggests that investors are still not making much credit differentiation between different gencos, even though there is now about $1.2 billion outstanding from seven dollar deals.

Kospo is Korea's largest non-nuclear power generator, with total capacity of WM7,571 as of April this year. It also ranks top in terms of its thermal efficiency ratio (41.86%) and utilization ratio (69.3%).

Balancing this, it is also the most highly geared, reporting a debt to capitalization ratio of 40.9% at the end of 2003, although this was less than the 43.6% ratio reported the year before. At the other end of the scale, Korea Midland reported a debt to capitalization ratio of 16% at the end of 2003.

In a recent credit report, Barclays said Kospo's financial profile should continue to improve despite required capital spending.