Pusan pulls off bond deal despite volatility

The Korean bank succeeds in raising $250 million even after the markets turn south.
KoreaÆs Pusan Bank priced a $250 million 10-year non-call-five lower tier-2 bond on Thursday, closing the deal (rated A3/BBB by MoodyÆs and Fitch) at 140bp over mid-swaps, or 204.5 over Treasuries. The transaction generated an order book of $400 million following a roadshow in Hong Kong and Singapore.

The deal, managed by Citi, Korea Development Bank and UBS, was announced in a relatively stable market on the Thursday of the previous week. However, the equities sell-off on Friday (October 19) was followed by significant volatility the following week.

ôKeximÆs new 2012s, which had priced at 116bp over Treasuries and tightened to 113bp over Treasuries in the secondary market, spiked out to 123bp on Monday before we started the roadshow," says a source close to the deal. "Equally, NACF's recent 2012 bonds, which priced at 121.5bp over Treasuries, spiked out to 135bp, which is a significant move for what are historically very stable and high-quality credits.ö

Markets were further destabilised when Merrill Lynch announced a write-down on Wednesday of more than $8.4 billion of assets last quarter, leading investors to wait until the next day before committing to the transaction. Eventually, a price guidance of 140bp over mid-swaps area was released on Thursday morning, prior to the deal pricing in the evening, 10bp back from PusanÆs own 2017 bonds.

ôThe transaction priced against the backdrop of a more challenging market, so they did well to get it done, especially a lower tier-2 subordinated bond,ö says one rival banker.

The bonds widened the following day on the secondary market to 207/202bp over Treasuries due, it seems, to an overall weaker Asian bond market ahead of results from Countrywide (the largest home lender in the US). Merrill LynchÆs fall-out is also still weighing on sentiment. In Asia, ICICIÆs 2012 bonds moved out by 4bp.

ôThe Pusan bonds are back from where they priced, but it's not disastrous," says one investor. ôWhether there was a speculative element to the deal is hard to tell with such a small size but few people are going to buy Pusan in the hope to make a quick buck - everybody has got their eyes open now. It also seems unlikely that investors sold off any surplus bonds since people don't really inflate their orders in this kind of market. I think it was a good price and a reasonable size, but it came at a time when the market was softer, and therefore marginally underperformed.ö

Although the markets turned unexpectedly, there was a strong rationale for going ahead with the deal. ôAccounts this week are likely to be more sensitive to the FOMC meeting on October 31, while the week of the November 5 is a clear window for issuance, so we expect a lot of upcoming supply,ö explains a source close to the deal. ôThatÆs why it was important to get it done when we did, and we navigated some pretty tough market conditions in order to do so.ö The deal was the only bond transaction to price last week.

In terms of geographic split, 50% of the bonds sold to Singapore, 20% to Hong Kong, 15% to Korea, and 15% to Europe. A total of 50% of the bonds sold to banks, 45% to funds, and 5% to other. In all, 35 investors participated in the deal, which priced at a discount of 99.796 and a coupon of 6% semi-annual. This amounts to a yield of 6.048%.

Pusan BankÆs last foray into the bond market, a $200 million 10-year non-call-five transaction in March which priced at 64bp over mid-swaps (and attracted orders worth $900 million), demonstrates the extent to which the risk premium has increased since the subprime crisis began. IndiaÆs ICICI Bank, which tapped the market three times this year, offered its latest $2 billion deal at 170bp over mid-swaps. This compares to an offering priced at 75bp over mid-swaps in January, and a second priced at a startling 50bp over mid-swaps in June, at the peak of the bull-run.

Based in Busan, KoreaÆs largest port city, Pusan Bank was established in 1967 and is a dominant presence in the city, with a growing market share in the surrounding Gyeongnam province. It enjoys good profitability, solid capital adequacy and much improved asset quality, according to a MoodyÆs report. As of June 30, 2007, the bank had assets of W24.4 trillion.
¬ Haymarket Media Limited. All rights reserved.

Article limit is reached.

Hello! You have used up all of your free articles on FinanceAsia.

To obtain unlimited access to our award-winning exclusive news and analysis, we offer subscription packages, including single user, team subscription (2-5 users), or office-wide licences. To help you and your colleagues access our proprietary content, please contact us at [email protected], or +(852) 2122 5222