Posco forges ahead with new debt deal

Korean steel maker gets ready to re-open Asia's investment-grade bond markets with a $300 million, 10-year offering.
ABN AMRO, HSBC and UBS have been mandated to lead a $300 million, 10-year Reg-S senior-unsecured bond offering for Korean steel producer, Posco. The new deal will kick-off three days of roadshows on Monday (July 31).

Roadshows will be conducted via two teams, one in Europe and one in Asia. Investor meetings are slated for London and Singapore on Monday, Frankfurt and Singapore on Tuesday, before wrapping up in Frankfurt and Hong Kong on Wednesday. Pricing will be subject to market conditions, but barring any unforeseen market irregularities the deal is expected to close toward the end of the week.

MoodyÆs has given the proposed deal an A2 rating, while S&P has assigned a rating of single-A-.

Posco is only looking to raise $300 million and have established a firm ceiling on the deal size. Consequently the leads have opted for a Reg-S structure only; judging that the deal will be easily covered without having to tap United States-based investors.

Relative comparables are difficult to pin down because of PoscoÆs superior financial position and the fact that it does not have any government backing or guarantee.

"Posco is a materially better credit than say a Korea Telecom or Korea Highway," says one syndicate banker. "They are better than anything you can find in Korea if you look at it as a stand-alone credit."

As of late Thursday, PoscoÆs five-year CDS was quoted at 26bp to 30bp.
The leads are not expected to release guidance until Tuesday (August 1) at the earliest.

Posco is the worldÆs fourth-largest steel maker, producing around two billion tonnes of stainless steel per year. Last year, the company produced 30.5 million metric tonnes of crude steel and 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 characterized 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.
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