LG Electronics issues upsized five-year FRN

New regulations preventing local Korean investors from buying corporate paper has an impact on the bond's pricing.
LG Electronics, a leading company in the global consumer electronics market, priced a $500-million deal last night at 73bp over three-month dollar Libor. The deal came in at the mid-point of initial guidance released earlier this week of 70bp-75bp over mid-swaps. The five-year Reg-S senior FRN, rated BBB-/Baa3, closed with a coupon of 65bp over Libor and a discount margin of 73bp over Libor.

The deal was managed by Deutsche Bank, HSBC, JPMorgan, KDB and Morgan Stanley, and involved a roadshow in Hong Kong, Singapore and London.

In terms of comparables, bankers quoted Hyundai CardÆs November 2010s, which were trading at 48bp over Libor, as well as Hyundai CardÆs January 2012s which traded at 57bp over Libor at the time of pricing. This equates to a curve of roughly 7bp to 8bp per annum, or 14bp to 16bp over two years.

LG Electronics' own June 2010s were trading at 57bp over Libor, implying a credit spread of 16bp per annum to yesterdayÆs transaction. This suggests a similar credit curve to Hyundai despite the latterÆs higher rating. According to bankers, the credit curve should be a little wider, since LG ElectronicsÆ rating places it on the cusp of a non-investment grade rating.

Bankers note that recent Korean corporate bond regulation preventing local investors from buying corporate paper will have had an impact on pricing. The extent of this premium is still unquantifiable, but sources suggest it could stand at two basis points, or more. Hyundai, the issueÆs closest comparable, was not subject to this regulation.

Over 70 accounts participated in the transaction, which built a final order book of $929 million. The deal was upsized from an initial $400 million (final terms of 73bp over Libor) to $500 million. In terms of geographic split, 58.7% of the bonds sold to Asia, 35.4% sold to Europe, and 5.9% to US offshore. 60.2% went to bank accounts, 29.6% to asset managers, 3.6% to retail and private banks, 2.6% to funds, and 4% to other. A last-minute surprise came from a number of asset managers, who placed a combined order worth $125 million.

LG Electronics was lauded for being responsive to investors, who overwhelmingly requested a FRN format instead of a fixed-note due to concerns over poor secondary performance. The company also differentiated itself from other Korean deals which until now had left very few basis points on the table. Investors believed that the pricing was fair, in terms of the credit. ôThere are not many triple-B companies that will give you this kind of spread either in the US or in Europe. Perhaps a BB-rating would trade at this level in the US markets,ö says one source on the buy-side.

Tighter pricing may have been unrealistic given the market's high supply of late, and the poor performance of Korea's secondary market. Questions also arose concerning the company's credit. A strategically important asset of LG Electronics' overall operations, LG.Philips LCD (which sells thin film transistor and liquid crystal displays and in which LG Electronics holds a 37.9% stake) has suffered from steadily decreasing margins. Margins fell from 21.1% in 2004 to 4.7% in 2005, and negative 8.3% in 2006, causing a sharp decrease in LG Electronics' operating profit from 2005 to 2006.

Other causes for concern were the companyÆs total debt-to-capitalisation ratio, which stands at 53%, and PhilipsÆ rumoured withdrawal from the group. But while this worries some, others are very optimistic. "The company is well-diversified. We view the TFT/LCD situation as a ôtroughö from which LG Electronics is likely to rebound." This view is supported by MoodyÆs, which expects the company to restore its operating performance within the next few years.

Whatever happens, market observers believe the companyÆs sheer size will allow it to absorb a good few shocks, while its strategic importance to the Korean economy should reassure skittish investors. Pricing performance, for its part, will be deemed successful if the paper trades close to or better than re-offer bid (73bp over Libor) over the next two to three weeks.
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