Korea's NACF prices bond at tight end

In the wake of Kexim's successful deal, the National Agricultural Cooperative prices a $400 million Reg-S bond and achieves an oversubscription level of four times.
Korea's National Agricultural Cooperative Federation (NACF) priced a Reg-S, $400 million five-year A/A+ deal yesterday, in the wake of KeximÆs $2 billion bond last week. The transaction, managed by Calyon, Morgan Stanley, and UBS, closed at a spread of 121.5bp over Treasuries, equivalent to 57bp over mid-swaps or 56.2bp over Libor.

The deal closed at the tight end of guidance, which was announced at 57bp to 60bp over mid-swaps, and tightened by one basis point on the break, indicating a good execution. Moreover, the deal was announced as a $300 million-$400 million trade, and succeeded in pricing at the top of that range.

Over 60 accounts participated in the deal, with bookrunners allocating 85% of the bonds to Asia and 15% to Europe. In terms of investor breakdown, 67% sold to banks, 27% to funds and 6% to other.

In terms of comparables, bankers quoted KeximÆs 2012 (5.5%) bonds, issued last week via ABN AMRO, BNP Paribas, Merrill Lynch and Morgan Stanley, which were trading at 113bp over Treasuries at the time of pricing, equivalent to 48.2bp over mid-swaps or 47.5bp over Libor. Bankers also quoted NACFÆs offer-side credit default swap (CDS), a benchmark for pricing bonds, which stood at 40bp. This means a 17bp differential between that and the price of the bond û flat to KeximÆs performance last week.

ôPricing 8.8bp back from where Kexim's bonds were trading is a good result. Investors donÆt usually get as excited about NACF as they do about Kexim, and this deal û being much smaller û doesnÆt offer as much liquidity," says a banker not involved in the deal. Furthermore, as well as being lower-rated than Kexim, NACF does not benefit from explicit government support.

Bad timing has dogged NACFÆs bond issues in recent times. In 2005, it offered a $400 million bond via Barclays, BNP Paribas and JPMorgan at a considerable concession, following the market-rocking downgrades of Ford and General Motors. In 2006, NACF also made a concession for a $400 million Reg-S lower-tier-2 10-year bond offering via BNP Paribas, Calyon and Merrill Lynch in the mist of a volatile market.

Further still in April this year, NACF conceded a basis point for a lower tier-2 $500 million bond issue via ABN AMRO, BNP Paribas, Citi and HSBC due to an Asian credit market weakened by inflationary data and a sell-off in equities (although still pricing the tightest ever for a subordinated Korean bank capital deal).

And yesterday the Asian market was also somewhat weaker following an earlier move in spreads, causing some investors to remain on the sidelines. ôIt was a fair price, but we didnÆt feel it adequately reflected the overnight widening in spreads, and believe it should have come at 60bp over mid-swaps rather than 57bp. So we didnÆt buy,ö says one investor.

Some of those who did buy had nothing to complain about. "This is a good little deal - done and dusted in a weaker market. And it was a good size as well: big enough, but not so big that it caused bonds to slosh around the market." This is an attractive feature for buy and hold investors.

Meanwhile, the argument that Kexim's deal was too large, causing liquidity to be sucked out of the market and leading investors to sell Kexim in order to buy NACF - rather than put new money to work - was refuted by numerous sources on the buy-side. "You may get a few sellers of Kexim as a result of the new deal, but that's only natural as people lock their gains in. The fact is that Kexim is currently trading at 110bp over Treasuries on the offer side, which is exactly where they were yesterday, and 6bp tighter than they came. Moreover, yesterday the markets were weaker, yet Kexim remained reasonably firm," says one investor.

"And finally, the oversubscription level of four times for NACF makes it quite obvious that new money was indeed put to work," he adds.
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