NACF launches bond with "heroic" guidance

Korean farmers' bank releases wide price guidance with the hope to build momentum against the back of a weak market.
Korean government-owned National Agricultural Cooperative Federation (NACF) has released initial price guidance on a small reg-S lower-tier 2 10-year non call five-year offering. The deal, led by BNP Paribas, Calyon and Merrill Lynch, was initially launched at $400 million and will now seek to raise $300 million in a market that has been very problematic for new issues in recent weeks.

This will be the third consecutive sub-debt offering from the Baa1/BBB+ rated Korean issuer, following similar deals in 2004 and 2005.

The leads announced guidance at 75bp over mid-swaps, which is about 10bp back of the secondary trading range of its own 5.125% May 2015 callable May 2010 and 16bp back of its existing 5.75% June 2014 callable June 2009.

ôThat is a pretty attractive level,ö says one Hong Kong based DCM banker. ôBut NACF will do well to go out at this level and try to bring pricing in once they have built a solid book.ö

Another banker was much more optimistic noting that, ôat those heroically wide levels this deal will work. NACFÆs curve respective to exactly the same deal it printed in 2005 is worth 3bp to 4bp, 5 max.ö

Additionally NACF has Woori Bank as its other primary benchmark. In April the Korean bank priced a similar $1 billion 2016 bond which was callable in 2011 that carried a comparable Baa2/BBB+ rating.

That deal was priced at 67bp over swaps, and is currently trading at 70bp over Libor.

Woori, however, had the good fortune to price its deal in the midst of a global bull run in Korean debt following a slew of ratings upgrades from the country. But the 5bp spread differential between the two further highlights how wide NACF is willing to go to ensure it prints this deal.

NACF already has to contend with a certain level of investor scepticism following the issuance of an arrest warrant and the continuing investigation of its chairman Chung Dae Kun for allegedly accepting unconfirmed amounts of money from Hyundai Motors in 2001 - allegedly for allowing the auto manufacturer to buy an NACF building in Seoul below fair market price.

However, the primary concern for both the borrower and the lead will be how stable the market environment is over the next few days as the deal closes in on final pricing.

Over the past few weeks the markets have been in a tailspin because of increasing uncertainty over the future direction of interest rate levels in the US.

More recently Federal Reserve chairman Ben Bernanke has appeared to be very hawkish on inflation. At a recent international monetary conference - while acknowledging that despite evidence the economy is softening, including the dreadfully weak 75,000 May non-farm payroll numbers - he said he was very concerned over troubling developments in terms of inflation, stating that ôthe Federal Reserve must remain vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.ö

The markets had hoped that the weaker than expected data releases were a harbinger for a halt in the Fed's 16 consecutive interest rate increases. However, BernankeÆs comments coupled with those of other Fed officials have raised speculation of further hikes.

This means that June 13th (BPI figures released) and 14th (CPI released) will be D-Days of sorts for the markets. With four full trading days before the market can fully absorb and interpret the data, this implies four days of further uncertainty for any prospective deal issuance.
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