Korean telcos engage international debt investors

Korea Telecom prices its first international bond since 1997 while LG Telecom launches roadshows for a debut issue.

Korea's largest integrated telco priced an increased $600 million 10-year bond issue yesterday (Thursday) via global co-ordinator JPMorgan and joint-bookrunner Deutsche Bank. Daiwa and Goldman were also named as joint leads.

The Baa1/A- rated deal was priced at 98.65% on a coupon of 5.875% to yield 6.057%. This equated to 130bp over Treasuries or 76bp over swaps. Fees were 30bp.

Pricing came at the tight end of a 130bp to 132bp range, which had been narrowed from 130bp to 135bp earlier in the week. The deal was also increased from a base size of $500 million after order books closed at the $1.69 billion mark.

Pricing represented a premium of about 15bp over recent quasi-sovereign paper from issuers such as Korea Highway, which has the full A3/A- sovereign rating. This was deemed fair considering Korea Telecom is rated one notch down by Moody's. Korea Highway's 4.875% April 2014 deal was being quoted yesterday at about 113bp over Treasuries or 60bp over swaps.

Specialists report a total of about 80 accounts in Korea Telecom's deal, with a geographical split of 45% Asia, 30% US and 25% Europe. Korea accounted for about half the Asian demand.

By investor type, funds took 45% banks 37%, insurance companies 16% and others 2%.

The deal was priced against a backdrop where underlying Treasury spreads were very volatile. At the end of May, 10-year Treasuries stood at 4.65%, but had spiked to 4.80% when Korea Telecom announced its deal last Wednesday. They went on to hit a peak of 4.87% as investors feared strong CPI numbers, before easing back to 4.75% yesterday after investors concluded they were more benign.

"The fact is interest rates are only going in one direction and if you are a fixed rate borrower, which most Asian clients are, then you want to be out in the market as soon as you can," says one observer. "Korea Telecom, therefore, took advantage of the first market window it could.

"But," he adds, "Investors are also taking their time to do their homework these days and are no longer just piling into deals willy nilly. Borrowers have to be prepared to spend more time discussing their credit story."

Korea Telecom is currently on positive outlook from Moody's and stable outlook from Standard & Poor's. At the end of 2003, it had total outstanding debt of Won9.015 trillion, equating to a debt to EBITDA ratio of 2.4 times.

In its ratings release Moody's commented that the group's rating could be upgraded if the company manages to spread out its maturity profile since redemptions spike over 2004 to 2005.

As Korea Telecom was pricing, LG Telecom set off on roadshows in the US for a $200 million five-year deal. Credit Suisse First Boston is lead manager of the transaction, which will be marketed in Europe towards the end of next week and Asia the beginning of the week after.

The deal offers investors rare exposure to high yield paper from Korea. The group has a Ba2/BB+ rating and there is no obvious comparable, although Hyundai Motor does have a similar Ba1/BB+ rating.

However, whereas Hyundai Motor trades like a solid investment grade credit, LGT is high yield. The former has a 5.3% December 2008 bond outstanding, which is currently yielding 5.7%, equating to 185bp over Treasuries or 145bp over swaps.

LGT, however, is likely to yield at least 200bp more than this level depending on how the lead is able leverage Asian and US demand. The best international proxy is said to be Canadian cellular operator, Rogers Wireless, which has a Ba3/BB+ rating and a five-year bond outstanding at 7.4%.

In Asia, the only other telcos with a similar rating are the much higher yielding Filipino credits, PLDT and Globe. The two are currently yielding about 8.25% to 8.3%

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