The world's largest steel manufacturer, Pohang Iron & Steel (Posco), is hoping that strong demand for yen product will enable it to price a new three-year offering inside of a three-year deal launched only two months ago.
Since the last offering, US rating agencies Moody's and Standard & Poor's have upgraded the group by one notch. Bankers believe that the stronger credit fundamentals will play well in the Japanese market, where improving liquidity has created demand for quality assets with a yield kicker.
Posco brought its last deal to market in May, with Nikko Salomon Smith Barney again selected as lead manager alongside Bank of Tokyo-Mitsubishi. Raising Ñ15 billion ($138.6 million), the three-year euro-yen offering was priced at par with a coupon of 1.51% to yield 75bp over yen-Libor.
At the time, competitor banks claimed that the deal had been priced about 10bp too tightly and that the two leads had been left with a very long position. This was, however, denied by the two banks in question, with officials stating that 60% to 70% of the deal had been pre-sold at launch.
Their rebuttal has recently been given added weight following the success last week of a Ñ30 billion five- year deal by Korea Electric Power Corporation (Kepco). With Merrill Lynch and UBS Warburg as lead managers, the electricity utility priced a euro-yen transaction with a two-year longer maturity at 83bp over yen-Libor.
Moody's rated Kepco at Baa3/BBB, one-notch lower than Posco, which most analysts regard as a slightly cleaner credit.
Price is right
Nikko SSB and Nomura are said to have won the new deal by submitting tighter pricing than Merrill Lynch and Morgan Stanley Dean Witter, which had teamed up to compete against them in the final bidding process. The deal, which should raise twice the amount of the May offering (Ñ35 billion), will also have a slightly different structure.
In a bid to ensure greater appeal among Japanese retail investors, the offering will have a Samurai rather than euro-yen/shibosai format. The launch is scheduled to take place during the first week of August.
The timing of the deal should also coincide with the release of first-half results, which are slated to show a doubling of net income over the first six months of the year. As a result of selling its stake in mobile phone operator Shinsegi Telecom for W950 billion ($860 million), Posco is expected to post net income to 30 June of W1.3 trillion, up from W684 billion a year ago.
Some analysts argue that Posco has a higher credit profile on a stand-alone basis now than it did before the Asian financial crisis, when it was rated A+/A2. Gearing ratios have improved significantly over the past year, for example, with debt to equity at the end of December standing at 68% compared to 95% the same time the year previously. Debt to EBITDA was only 1.93 times and EBITDA to interest coverage at a comfortable 7.74 times.
High levels of cash have enabled the company to purchase its own stock, which has been languishing for most of the year because of an overhang created by the failure of Korea Development Bank to sell its remaining stake.