Overflowing demand for Korea Water

Another momentum trade from Korea as Kowaco makes its international bond market debut.

Korea Water Resources Corporation (Kowaco) completed its debut international bond yesterday (November 4) with a $150 million deal via Citigroup and UBS. Like most of its immediate predecessors, the 10-year deal generated a huge order book of $1.5 billion and was priced ahead of schedule.

Roadshows were bought forwards by a couple of days and London presentations were cancelled in order to take advantage of the strong market tone. As one participant notes, "A lot of global issuers had been reluctant to set a launch date so soon after the US Presidential elections and ahead of the non-farm payroll numbers. But it meant Korea Water has been able to take advantage of strong sentiment with virtually no competing issues from anywhere else in the world."

Pricing of the Reg S deal was settled at 99.406% on a coupon of 4.875% to yield 4.951%. This equates to 87bp over Treasuries and 43bp over Libor. Fees were 25bp.

The deal was priced at the tight end of guidance after an unusual bookbuild. The leads decided to abandon the age-old strategy of going out with wide guidance in the hope of building momentum and tightening it. Instead, there was no formal guidance at all during the first day of bookbuilding and then a final indicative price range at the beginning of the second, which was stuck to.

At 43bp over Libor, Kowaco has been fairly aggressive compared to its most immediate comparables. Its two closest benchmarks are state-owned government agencies Korea Highway and Korea Land. All three credits share the same A3/A- sovereign level credit rating.

At the time of pricing, Korea Highway's 4.875% April 2014 bond is said to have been bid at 39bp over Libor. Korea Land's 5.75% May 2014 deal was bid at 42bp over. On a like-for-like basis, Kowaco has priced a couple of basis points wide of Korea Highway and a couple inside Korea Land.

Observers say this can be attributed to its rarity value and strong credit statistics. About 86 accounts participated in the deal, which had a split of 75% Asia, 23% Europe and 2% US. About 15% of the total went to Korea.

By investor type, banks took roughly 45%, asset managers 30%, insurance companies 15% and others including private banks and pension funds, the remaining 10%.

Kowaco currently runs a debt to capitalization ratio of less than 20% and EBITDA/interest coverage ratio of more than six times. However, in its ratings review, Moody's said that debt is likely to increase under the burden of a fairly heavy capex plan.

"Kowaco has a heavy capex programme, which will not be covered by its operating cash flow and anticipated government funding," it commented. "Under the long-term Water Resources Master Plan, Korea will face shortages by 2006 and the government plans to secure - mainly through the corporation - new water resources by constructing multi-purpose dams and waterwork systems."

But it also said that government ownership (currently 99.9%) and funding will remain strong. "Moody's notes that Korea is classifedby the United Nations as a water-scarce country with per capita precipitation at about 2,705m3, equal to about 12% of the global average. Therefore, management and storage of water - a crucial, but scarce resource - are of critical important. Moody's believes Kowaco will continue to play its key role unde the Kowaco act, performing its essential public policy of managing and providing a stable supply of quality water."