Posco taps bond market with $700 million deal

Korea's leading steelmaker attracts strong demand for its 10-year bond, despite anxieties about its purchase of Daewoo International.

The world’s third biggest steelmaker, Pohang Iron and Steel Company (Posco), priced its second international bond issue in two years late Thursday.

According to the company, Posco plans to use the proceeds from the sale to pay for raw materials and overseas investments, such as the construction of steel mills in foreign countries and the development of mines for raw materials.

The $700 million 144a/Regulation S issue pays a 4.25% coupon, and was re-offered to investors at 99.557 to yield 4.305% to a maturity date of October 28, 2020. It is the first 10-year global bond by a South Korean private company since 2007.

Posco last raised cash through a public offering in the international debt capital markets in March 2009, with a five-year bond paying an 8.75% coupon. Conditions were much tougher for borrowers then, being at the height of the global credit crisis.

This latest issue was priced at a spread of 179bp over the yield of the 10-year benchmark US Treasury, which translated into 174bp over mid-swap levels. That was more or less flat on the yield curve to where the Posco 2014 bonds were bid. Initial guidance earlier in the week had been 190bp to 200bp over the Treasury yield, which was later tightened to 179bp to 185bp. On Friday, the spread over Treasuries narrowed by 5bps in the gray market.

Posco is rated A2 by Moody’s Investor Services and the equivalent single-A by Standard & Poor’s.

In August, the Korean steelmaker completed its $2.8 billion acquisition of Daewoo International. It is the biggest deal between two Korean companies so far, and signalled Posco’s ambition to expand in Africa and Southeast Asia, according to analysts. Daewoo International was already one of the largest traders of Posco products and a significant revenue earner for the company. Posco’s shareholders include Warren Buffet’s Berkshire Hathaway.

But, the firm’s’ announcement that it would fund the deal without a financial investor, and concerns about Daewoo’s operations, led Moody’s to immediately downgrade Posco’s foreign currency bonds from A1 to A2, with a negative outlook.

However, bond investors were not discouraged. The order book totalled $3.8 billion at the final price guidance and 302 accounts participated in the transaction. There was strong, widespread interest in a long-term asset issued by a well-regarded name and, unlike its five-year deal in 2009, the success of the transaction did not rely on large anchor bids from major US investors.

Geographically, the allocations were split 38% to Asia, 16% to Europe, and 46% to the US. By investor type, 38% was placed with fund managers, 19% with insurance companies, 14% with commercial banks, 5% with private banks and the remaining 24% with undisclosed other accounts.

Bank of America Merrill Lynch, BNP Paribas, Deutsche Bank, Goldman Sachs and Morgan Stanley were joint bookrunners and lead managers for the offering.

¬ Haymarket Media Limited. All rights reserved.