The extremely tight pricing of the three year transaction due August 25 2003 has provoked sharply differing reactions among Yen bond players. On the one side, outside observers argue that a launch spread of 65bp over Yen-libor is at least 10 to 15bp too tight, while lead managers Nikko Salomon Smith Barney and Nomura respond that a combination of factors enabled the deal to sell out even though it might initially appear aggressive.
Indeed in their efforts to convince the market that they had got it right, the two banks accompanied a tightening of the launch spread from 70bp to 65bp with a widening of fees from the customary 45bp to 50bp level up to 52.5bp. Final pricing at par saw a coupon of 1.44% and launch spread of 65bp over Yen-libor, representing 77bp on a dollar libor basis.
This compares to a launch spread of 75bp over Yen-libor for Posco's outstanding Y15 billion three year euro-Yen which was launched in May again via Nikko Salomon Smith Barney alongside Bank of Tokyo-Mitsubishi.
However, given that most Japanese investors take a buy and hold approach to the market, a more relevant pricing benchmark is offered by the company's outstanding dollar bonds. At the time of Tuesday's launch, Posco's July 2003 transaction, for example, was trading at 183bp/173bp over Treasuries, equating to 100bp over on libor basis.
Huge liquidity in the yen markets combined with contracting domestic spreads and a scramble for yield in a low interest rate environment has enabled a number of highly-rated foreign credits to price inside their outstanding dollar levels. Posco's lead bankers argue that although the steel company has a lower Baa2/BBB-rating, it has been able to perform a similar feat.
Both banks also comment that they were sold out after launch, with all paper distributed domestically and to institutions rather than retail investors.
Says one banker, "There were some concerns before launch, but the fact is that it sold very well. There has been very little corporate supply in the Samurai market, Japanese investors are keen to buy into Korea's improving credit story, Posco has been upgraded since the last deal and they like the company because it has close ties to Nippon Steel with which it recently completed a new cross shareholding agreement."
"Furthermore," the banker adds, "There are technical factors at work. With the underlying Yen-Yen swap rate standing at 0.79 and this deal offering 0.65, the total return is 1.44%. Nearly half the yield is due to the spread, not the underlying treasury and this means that the incremental pick up over JGBs is much higher than would be available in the dollar market. For example, for an investor to double their yield in 10 year dollar paper where underlying Treasuries stand at 6.75%, they would need to pick up corporate paper with a yield of 12% plus."
Lead bankers hope that Posco's latest transaction will encourage new corporate credits from Asia and particularly Korea to consider funding in Yen. Others are not so sure this will necessarily be positive for the market.. "Posco has created a rod for all our backs," says one. "All borrowers and especially the Koreans are going to use it as a pricing benchmark from now on and we for one don't want a whole lot of tightly priced paper sitting on our books because investors won't touch it."
