Kospo breaks market deadlock

Kospo raises $300 million in the first Asian dollar deal since early February, pricing at the tight end of revised guidance and attracting $1.65 billion in orders.
Korea Southern Power (Kospo) broke the deadlock in Asian primary markets on Friday when it issued a $300 million Reg-S 144A five-year bond, attracting a total of $1.65 billion in orders. ABN AMRO, Deutsche Bank and Citi managed the transaction.

The deal launched just ahead of economic data reports due out this week, including two inflation indicators û the producer price index and the consumer price index û and earnings reports from JPMorgan, Merrill Lynch and Citi.

On Monday last week, the leads released guidance of 220bp over mid-swaps issued, but the transaction priced at the tight end of revised guidance set at 208bp-212bp over mid-swaps on Friday (289.6bp over five-year US Treasuries). The coupon equalled 5.375%, and the price 99.61.

Kospo priced 20bp back from similarly rated Korea Midland PowerÆs (Komipo) 2013s. Meanwhile, the parent company Korea Electric Power Corporation's credit default swap (CDS) was trading at 135/125 at time of pricing.

A total of 105 accounts were allocated bonds, with 49% of the bonds selling to Asia, 18% to Europe and 33% selling to the US. In terms of investor-type, banks bought 26% of the bonds, fund managers 26%, insurance companies 21%, pension funds 12%, hedge funds 11%, and retail and other 4%.

The distribution to US accounts was relatively significant despite initial doubts about US participation. Even though US investors tend to prefer larger, more liquid transactions, the predictable cash flow of the company, its improving metrics, and its low correlation with the financial sector played in its favour. Moreover, a large portion of the buyers were insurance companies and pension funds, who are less concerned about aftermarket liquidity.

Real money US accounts are rumoured to have placed large orders. It seems that fewer US accounts participated in the transaction than the percentage of their allocation suggests. The largest ticket was reportedly $50 million, which presumably went to the US, vindicating the company's decision to opt for a 144A structure.

The bonds tightened yesterday to 283/278 over US treasuries. ôThe bonds have performed remarkably well,ö says an investor. ôThe overall single-A market is 15bp weaker in Asia, and KospoÆs bonds have rallied seven basis points, so net outperformance is impressive,ö he continues. Market specialists believe it is likely that a number of accounts were not allocated bonds. ôWhen accounts are allocated less than they wanted, they sell in secondary and the bonds tend to underperform.ö

That the bonds were placed in safe hands is also supported by the relevant CDS level remaining fairly consistent while the trade progressed. This suggests that negative basis trade players such as hedge funds (or faster money accounts) stayed away due to their concerns about liquidity. (A negative basis trade occurs when an investor buys a bond and buys protection on the same name. If the basis is negative - that is, the credit default swap spread is less than the bond spread - the buyer can receive a spread without taking on any default risk.)

Despite the rally in the secondary market, syndicate bankers who were not involved in the transaction, say the pricing level was appropriate. ôI thought 210bp over mid-swaps would be fair, and they priced inside that level,ö says a one banker. The bonds priced only 73bp back from Kepco CDS (there is no quote for Kospo CDS), versus Komipo which priced 95bp back.

Moreover, the leads held the deal together despite the market weakening last week, and the disappointing earnings announcement from General Electric which came out shortly before the deal priced.

ôItÆs a good outcome," says a rival banker. ôThe deal attracted strong levels of subscription, priced at the tight end of revised guidance, and the bonds have performed well in the secondary market.ö

Komipo and Kospo are two of six wholly owned generation subsidiaries of Korea Electric Power Corporation.
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