Posco, South Korea's largest steelmaker and the world's fourth biggest, plans to raise a minimum of $500 million from the sale of five-year senior global US dollar bonds, and could price the deal as early as Thursday evening, New York time, according to banking sources.
The transaction would mark the first US dollar bond offering from an Asian corporate this year, and the first since the $1 billion issue by Hong Kong and China Gas in July 2008.
The company completed a two-day roadshow yesterday, during which one team of representatives and advisers visited Singapore, Hong Kong and London, and another met investors in Los Angeles, New York and Boston.
The issue is likely to yield around 9.5%, say sources -- higher than initial price talk of closer to 9%, and a hefty premium for a company rated A1 by Moody's and single-A by Standard & Poor's. Posco's 5.875% bonds due in 2016 were last trading at around 9%, and its five-year credit default swaps are quoted at 330bp.
But last week Moody's cut its outlook on Posco to 'negative' from 'stable', pointing to the deterioration in the global steel industry, as demand for cars and other manufactured products using steel has slumped.
In late February, Warren Buffet's Berkshire Hathaway increased its stake in Posco to 5.2% after the steelmaker's share price suffered its first annual fall in six years in 2008, and after it cut its production last December for the first time in its 40-year history. On the positive side, Macquarie Group analysts reported earlier this month that Posco had settled its first pulverised coal contracts for 2009 at a price 63% lower than last year.
The bond sale will test investor appetite, not only for deals by private companies in Asia, but also for a queue of Korean issuers getting ready to tap the international capital markets to meet urgent refinancing needs this year. Borrowers might also be encouraged by a recent strengthening of the won, and hence be more confident about their ability to service future external debt.
Two Korean lenders, Hana Bank and Industrial Bank of Korea (IBK), are planning to issue US dollar bonds in the near future, and are likely to make use of state-backing in order to reduce their funding costs. Hana, the country's fourth biggest bank, said in an email to local media earlier this month that it might issue $500 million of three-year global bonds backed by a government guarantee. If so, it will be the first Korean bank to use the guarantee facility which was introduced last October.
Meanwhile, state-owned IBK is planning to raise between $500 million and $1 billion, and has appointed Citi and Merrill Lynch to organise an international roadshow. IBK, which is rated A by Standard & Poor's, A2 by Moody's and A-plus by Fitch, is due to buy back $300 million of subordinated bonds at a call date in May.
In early February, Korea's second biggest bank Woori upset investors when it decided not to call $400 million of lower tier-2 bonds maturing in 2014, making it the first Asian bank not to redeem its subordinated debt early. By contrast, Shinhan, the country's third largest lender, reassured investors by saying that it would exercise a call option on $400 million of subordinated debt.
In January, state-run Korea Development Bank and Export-Import Bank of Korea each raised $2 billion through an issue of five-year bonds, eschewing an explicit state-guarantee. However, the policy bank had to pay a hefty spread premium of around 650bp over US Treasury yields.
Other government-owned enterprises are set to follow. The Korea Economic Daily reported on March 6 that 18 state-run Korean companies intend to raise about $10 billion in overseas bond markets this year. These include: Korea National Oil Corp with plans for $1.7 billion; Korea Electric Power Corp (Kepco), which aims for $600 million; and Korea Gas Corp (Kogas), which seeks to raise $500 million.
However, next after Posco is likely to be state-owned Korea Railroad, which is setting off on a roadshow next week, with Citi again one of the organisers. The troubled US bank has enjoyed a mandate bonanza from Korean borrowers during the past few weeks, being the only bank among a wide group appointed for individual deals, to be selected for all the live issues: Posco, Hana, IBK and Korea Railroad.
Deutsche Bank, Goldman Sachs, HSBC and Merrill Lynch join Citi as underwriters for the Posco bond.