NACF clears market: at a price

Quasi-sovereign credit accepts market reality.

The National Agricultural Co-operative Federation (NACF) returned to the international subordinated debt market for the first times since June late on Thursday with a $400 million issue via Barclays, BNP Paribas and JPMorgan.

Like Korea Highway a few days before it, NACF had to price off a secondary curve that had widened over the course of the marketing period. Unlike Korea Highway, it also needed to pay a comfortable new issue premium in order to secure a strong enough order book.

Pricing of the 10 non-call five (fixed to fixed) deal came at 99.457% on a coupon of 5.125% to yield 5.25%. This equated to 145.3bp over Treasuries and 100bp over mid-swaps. Fees were 35bp.

At the time the Baa1/BBB-rated deal was priced, the group's existing 5.75% June 2014 deal callable in June 2009 was trading at 85bp over mid-swaps. Taking into account about 6bp on the curve, this means the new lower tier 2 deal has priced at a new issue premium of roughly 9bp.

However, the existing deal had been trading around the 72bp level at the beginning of the week, only to widen as investors sold it off to make way for the new one.

NACF's other main benchmark is IBK, which has a January 2015 bond callable in 2010 outstanding. At the time NACF priced on Thursday, this was trading around the 70bp level, which means NACF has priced at a roughly 27bp premium taking account of the curve.

Typically, NACF trades at no more than a 10bp to 15bp premium to IBK and when it priced its last $250 million lower tier 2 deal in June, it came at roughly 17bp over.

For NACF officials, pricing must have been particularly galling in the context of where they had first tried to pitch the deal in mid-March. At that point, indicative pricing had been set at 65bp over Libor, some 35% tighter than where it finally ended up.

When the leads went out with indicative pricing around the 100bp area for the new deal, they would have been hoping to tighten it as the book built momentum. But this was not to be the case.

The distribution statistics show that many investors still remain on the sidelines, leaving those prepared to participate with a lot of pricing power. A total of 52 investors placed orders for $750 million.

By geography the book split 41% Asia, 31% Korea and 28% Europe and offshore US. By investor type asset managers took 71% and banks 29%.

Non-syndicate bankers concluded the deal was fairly priced considering how difficult market conditions remain.

"Liquidity is very thin and it really doesn't take very much to move the market at all," says one observer. "The problem is that when investors sold out of NACF's existing deal to make way for the new one, there was no-one making a back bid to support the secondary market."

Bankers say the same thing happened when the new deal was free to trade. The deal closed the day about 5bp to 6bp tighter around the 137bp level - bolstered by a stronger market tone, but very thin liquidity.

"It's good to see some deal flow again," one banker concludes. "But it's very definitely a buyers' market at the moment and only defensive credits will work."