NACF to harvest dollar bonds

Korea''s National Agricultural Co-operative Federation (NACF) mandates ABN Amro and Merrill Lynch for an inaugural bond deal.

Adding to a growing pipeline of prospective deals due from Korea over the next month, NACF is said to be preparing a $300 million issue. The company's ratings advisor, ABN Amro and Merrill Lynch have been given the books for the five-year deal, which is expected to launch in late June.

The most comparable pricing benchmark for the group is likely to be the Industrial Bank of Korea (IBK) with whom it shares the same BBB+ rating from Standard & Poor's. It seems certain to pay a very small premium, however, because it has not yet established the same track record with investors.

During Asian trading yesterday (Monday), IBK's 4.375% December 2007 issue was trading at 103.68% bid to yield 3.49% or 117bp over Treasuries.

S&P rates both NACF and IBK one notch below the sovereign ceiling largely because they have a less explicit form of government support than the country's other two policy banks, KDB and Kexim, which each hold the sovereign rating.

In the case of NACF, article nine of the Agricultural Co-operative Law states that the government shall "make the best efforts" to meet any of the federation's financing requests. In 2000, for example, it merged NACF with two virtually insolvent domestic co-operatives - the National Livestock Co-operative Federation and National Ginseng Co-operative Federation. In return, it injected Won96.2 billion ($80 million) of new capital into the federation via preference shares.

NACF also differs from the other three policy banks because it has much stronger public service role, with less emphasis on profit. It was set up in 1961 as one of five specialized financial institutions with the goal of improving the economic and social status of the farming community. As of December 2002, it housed 1,383 co-operatives.

According Japanese rating agency JCR about 77.2% of the bank's Won148.6 trillion ($124 billion) asset base comprises credit and banking, with co-operative insurance accounting for a further14.8%, marketing and supply operations 6.3% and guidance 1.7%.

In its ratings release S&P concluded that the bank enjoys, "strong brand recognition, sound asset quality and solid liquidity, which contribute to its low funding costs."

NPL's, for example, totalled 1.8% as of September 2002, better than the average for the Korean banking sector. NACF's capital base, on the other hand, is slightly weaker than the average, with a total CAR of 10.35% at the same date, of which tier 1 accounted for 6.14.%.

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