Korea's smallest cellular operator completed its first international bond issue on Friday, raising $200 million from a five-year eurobond led by Credit Suisse First Boston.
The Ba2/BB+ rated deal was priced at 98.01% on a coupon of 8.25% to yield 8.75%. This equated to 510bp over Treasuries and about 455bp over Libor.
Pricing at this level was significantly higher than most market observers were initially anticipating. But it is less surprising in the context of a market where no Asian high yield deals have been successfully completed since March and investors have lost a lot of money.
Getting investors back to the primary market clearly requires intensive credit work and the kind of pricing cushion that not all borrowers will willingly stomach. In this instance, there was also no backstop bid from Korea, which meant a lot of pricing power was ceded to US investors, which are nearly always more price sensitive.
However, the order book was deeper and more diversified than a couple of the most recent Asian bond deals. In a book totaling just over $250 million, 45 accounts participated overall.
By geography, 50% came from the US, 40% from Asia and 10% from Europe. There were no orders from Korea itself.
By investor type, 55% were funds, 18% insurance companies, 17% retail and 10% banks.
The best pricing comparables were Filipino credits such as PLDT and Globe, which share similar credit ratings to LGT of Ba2/BB. PLDT has a 10.5% March 2009 bond yielding around 7.7% and Globe has an April 2012 bond callable in 2007 trading around 7.10%.
Originally, some market participants thought LGT would price close to these levels and in line with global credits such as Ba3/BB+ rated Canadian cellular operator Rogers Telecom, which has a five-year deal trading around the 7.5% level.
In Asia, a much lower rated Indonesian rated credit such as B2/B+ rated Excelcomindo trades at 9.34% on its January 2009 bond, while B2/B+ rated Indosat has a November 2010 bond callable in 2008 trading around 7.65%.
Difficult market conditions aside, there are two significant differences between LGT and both the Indonesian and Filipino credits, which partly explain the pricing differential. Firstly LGT is much more highly leveraged. Secondly, it is, therefore, a true non-investment grade credit rather than a strong operator in a lowly-rated country.
Indeed, in its ratings release for the deal, Moody's said that LGT would have been rated one-notch lower on a stand-alone basis had it not been for the support of its parent LG Group, which owns 37.4%.
LGT's credit stats show a current gross debt to EBITDA ratio of just under four times. This is similar to the ratios PLDT was running back in 2001 when it embarked on in its de-leveraging programme. Since then the Filipino operator has seen debt to EBITDA drop from 4.2 times at the end of 2001 to 2.7 times at the end of 2003.
By contrast, Globe had a debt to EBITDA ratio of two times at the end of 2003, while Indosat was at 1.7 times and Excelcomindo 2.6 times.
Analysts say LGT currently runs a gross debt position of Won1.9 trillion ($1.6 billion) once capital leases and other off-balance sheet instruments are taken into consideration.
By the end of 2005, however, the group has pledged to reduce debt by Won200 billion. During roadshows it also said it will continue to use marginal free cash flow to reduce gearing.
The second major credit constraint is its maturity profile, which is very short. About 50% of debt is due this year and 50% next year. This largely stems from difficulties extending out beyond three years in the domestic market. The dollar bond was, therefore, intended as a first step towards rectifying this.
But observers say the biggest hurdle LGT faced with investors was its size and market share. The company is far smaller than its two rivals SK Telecom and KT Freetel and has a market share of only 15%. In many ways, this makes it more akin to Excelcomindo, Indonesia's third player.
As one observer explains, "LGT was able to overcome this by showing that its market share has been very stable. It was also able to ease concerns about potential and negative changes in the regulatory environment."
Both rating agencies conclude that Korea is committed to three cellular operators and has adjusted regulations to support this. With a high penetration rate of 70%, the biggest issue Korean players now face is how to maintain subscribers and prices rather than find new clients. As such the introduction of mobile number portability (MNP) could prove a de-stabilising factor.
Yet as Moody's point out, the regulator has slanted the policy in LGT's favour. "The staggered MNP rollout allows LGT to aggressively chase the others players' subscribers whilst enjoying greater protection for its own subscriber base."
Following LGT, the next Korean deal is likely to be a benchmark offering by the Korea Development Bank, which could launch as early as today. Mandated to Barclays, Credit Suisse First Boston and HSBC, the issue size is likely to be up to $1 billion and will have an intermediate maturity of either five or seven-years.