Posco bond strikes while the iron's hot

Korean steel manufacturer closes its dollar deal at the tight end of initial guidance.
ABN AMRO, HSBC and UBS closed AsiaÆs second high-grade deal in less than a week on Thursday (August 3). Korean steel producer, Posco, priced a $300 million 10-year Reg-S senior-unsecured bond offering at the tight end of initial guidance.

The A2/A-/A- rated deal kicked-off three days of roadshows on Monday (July 31). Roadshows were conducted via two teams, one in Europe and one in Asia. Investor meetings were slated for London and Singapore on Monday, Frankfurt and Singapore on Tuesday, before wrapping up in Frankfurt and Hong Kong on Wednesday.

Guidance was announced on Tuesday afternoon in Asia (Tuesday morning in London) at 40bp to 45bp over mid-swaps. However that was then revised to 40bp over on Thursday as the deal gained traction.

The notes priced at 99.671% on a coupon of 5.875% to yield at 5.919%. That is equivalent to a spread of 40bp over mid-swaps or 96bp over comparable US treasuries. Fees were 0.35%.

The book closed 2.5-times oversubscribed with over 50 accounts taking allocations. In terms of investor type, banks bought 49% of the deal, asset managers took 36%, pension funds and insurers 12%, while others took 3%.

In geography terms, 53% went into Asian accounts, 31% to Europe and the remaining 16% went to offshore US books.

With the secondary market relatively illiquid ahead of next week's FOMC meeting, it is no surprise that the book built with little fanfare. Secondary market trading volumes are running at around 50% of typical levels, so investors taking part in these type of deals are more likely to place orders that they are willing to buy-and-hold.

Relative comparables are difficult to pin down because of PoscoÆs strong financial position and the fact that it does not have any government backing or guarantee. However, bankers did quote PoscoÆs existing seven-year Ñ50 billion samurai trade. That deal, held largely by Korean banks, was quoted at 45bp over yen-swaps, which is equivalent to 50bp over dollar-swaps.

Additionally, as of late Thursday, PoscoÆs five-year CDS were being quoted at 26bp to 30bp.

Posco is the worldÆs fourth-largest steelmaker, producing around two billion tonnes of stainless steel per year. Last year, the company recorded consolidated sales of W26.3 trillion ($27.9 billion). However, the rising cost of iron ore and increasing competition from China have cut into the companyÆs net income.

On July 12, Posco reported a net income decline for the third consecutive quarter, when second quarter profits fell to W710 billion ($755 million), a year-on-year decline of 44%. That is slightly tempered by the fact that Posco achieved an increase of 19.3% in sales and 4.3% in net profits compared to the first quarter of 2006.

Profits are also expected to rise in the second half as the company looks to increase steel prices to curtail income shortfalls because of rising nickel prices. Last week, Posco increased the price of its stainless steel cold-rolled coil to W3.15 million ($3,350) per metric tonne û an increase of 9%. It also raised the price of its stainless steel plates by 10% to W2.99 million per tonne.

In its rating's report, S&P states that "PoscoÆs financial profile is characterised by high, relatively stable profitability, solid cash flows, and a net cash position. However, it is not the companyÆs policy to maintain a net cash position. The company has large cash needs with substantial capital investment plans for the next few years, and a strategy of buying back shares and paying high dividends."

"Still, Posco maintains an operating margin before depreciation that is much higher than that of most of its Asian and global competitors, averaging roughly 27% over three years. The companyÆs high margin reflects its low cost position and pricing power in the domestic markets," the ratings agency adds.

Proceeds from the sale of the notes will be used to pay down existing debt, to purchase raw materials and for general capex purposes.
¬ Haymarket Media Limited. All rights reserved.
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