NACF to issue debut sub debt deal

Roadshows begin today for a $250 million to $300 million transaction.

Joint lead managers ABN AMRO, Credit Suisse First Boston and HSBC launch roadshows in Seoul today (Tuesday) for a debut lower tier 2 deal by the National Agricultural Co-operative Federation (NACF).

Presentations then continue in Hong Kong, Singapore and London before scheduled pricing at the end of the week. However the borrower is keen to emphasize that the issue will only go ahead if market conditions remain stable.

Korean sub debt spreads were among the worst hit during recent sell-off and while the market has re-bounded over the past few days, underlying sentiment remains nervous and volatile.

NACF is likely to be closely benchmarked to government-owned IBK since the two credits share the same split rating of BBB+/A3. The sub debt issue will have a rating of BBB/Baa1. IBK's $300 million 4% March 2014c2009 issue is currently trading at 170bp over Treasuries, some 32bp wider than its launch spread of 138p over.

In a research report published yesterday, Barclays said it believes Korean sub debt spreads will benefit most from an expected market re-bound this week. The bank wrote, "we believe poor performance reflects a) duration shortening by investors in response the sharp rise in US Treasury yields, b) the recent poor performance of financial credits globally in anticipation of Fed tightening."

It argued that this performance may be misplaced because its, "Horizon return analysis points to outperformance of Barbell portfolios of investment grade credits on the back of a bearish flattening of the US Treasury curve (notwithstanding potential greater spread widening of long-dated investment credits, our US Treasury forecasts are for the 30 year US Treasury yield to firm only 25bp from current levels)."

It also says monetary conditions in Korea are not likely to tighten much, this year, given the recent rise in USD/Asia and with central banks across the region on hold.

Key for NACF will be how close it can price relative to IBK. When it first came to market in June 2003 it raised $400 million in five-year money at a 5bp to 7bp premium to IBK.

Its 3.45% senior deal was priced to yield 144bp over Treasuries. Today it is yielding 4.97% or 110bp over Treasuries. This represents a 17bp premium to IBK, which also has a June 2008 bond outstanding yielding 4.8% or 93bp over Treasuries.

NACF's new deal will replace maturing won-denominated sub debt. The government-owned group has a capital adequacy ratio a shade over 10%, although this would fall below the minimum threshold if it was not able to include insurance reserves.

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