Shinhan bond flies behind FOMC doves

Strong reception as Korea's most profitable bank launches its first Basel III bond.
Credit flies as FOMC slows rate hikes
Credit flies as FOMC slows rate hikes

Korea's most profitable bank executed its first Basel III-compliant bond on Thursday, receiving an extremely strong reception from investors due to its rarity value and dovish comments from the FOMC one day earlier. 

Bankers said the order book peaked around $5 billion and closed at $3 billion with investors seeking to ride the improving credit market backdrop and get access to Korea's most sought-after banking credit.

The capping of the issue size at $500 million also helped spur demand from the outset.

"A lot of real money accounts came into the order book very quickly," said one banker. "All the Korean banking senior bonds are trading at very tight levels but subordinated debt offers investors a good combination of a much higher yield and very investor friendly regulation."

The banker added, "It's also very noticeable that in an uncertain global economic environment investors feel much more comfortable heading down the capital structure with higher rated credits than down the credit spectrum."

Shinhan's appeal was boosted by the fact that it is a very rare issuer in the international bond markets.

The new 10-year bullet transaction not only marks the bank's debut Basel III-compliant bond but also its first dollar-denominated bond since January 2012. Last year, for example, it raised just €120 million and Rmb1 billion through the dim sum market, according to S&P Global Market Intelligence figures.  

Korea's pool of outstanding Basel III bonds is also very small. 

Prior to Shinhan's new Tier 2 deal, there were just four bonds outstanding: two from KEBHana totalling $600 million and two from Woori totalling $1.5 billion. KB Kookmin Bank has yet to issue. 

Initial pricing was pitched at 230bp over Treasuries before being narrowed to between 205bp and 210bp over. Final pricing was fixed at 99.361% on a coupon of 3.875% to yield 205bp over Treasuries.

A total of 228 investors participated of which 60% came from Asia, 24% from the US and 16% from EMEA. By investor type, 66% went to funds, 20% to insurers and pension funds, 11% to banks and 3% to private banks.  

The lack of comparables made fair value estimates difficult, although syndicate bankers estimated it priced flat. 

The syndicate pitched KEBHana's $300 million 4.25% October 2024 bond as the best pricing benchmark. This opened Asian trading on Wednesday at a G-spread of 205bp. 

However, post FOMC buying demand pushed the whole Korea credit curve in by about 1bp to 2bp over the course of the Asian trading day. Sales desks said Woori's $1 billion 4.75% Tier 2 April 2024 bond was a particularly strong performer, trading up by nearly a point to a bid price of 104.12% or 223bp over Treasuries. 

On the surface, Shinhan appears to have priced through fair value given its new bond is 17 months longer than KEBHana's October 2024 paper. However, Shinhan's Baa1/BBB+/BBB+ offering is rated one-notch higher by all three agencies. 

Inverted curve

The Korean curve is also flat-to-inverted at its 10-year point. Onshore investors, particularly yield-hungry insurance companies, have been big buyers of longer-dated paper and bankers said they also participated in Shinhan's deal, although were capped at a 20% allocation.

As a result, both KDB and Kexim have a flat curve on a yield-to-maturity basis and inverted curve on a Z-spread and G-spread basis. For example, KDB's 2024 and 2026 bonds are both yielding 2.75% but 114bp and 99bp over on a Z-spread basis. 

On this basis, Shinhan is likely to trade up on Friday if credit markets remain bullish.

Renewed positive sentiment may also reverse the recent downswing across the Korean banking sector and Asian credit universe. The country's bank capital bonds have been trading down since February 5 when KEBHana's 2024 bond hit a year-to-date peak bid price of 104.63%. 

Prior to this, the bond's 2015 peak came in mid-April when it hit 105.68% before trading down to a low of 100.51% in early September, then gradually reviving again.

Syndicate bankers argue that the long end of the curve and particularly emerging market bonds should start to perform now the Fed has eased the speed of interest rate hikes and the US dollar has started to weaken. Having previously indicated it would hike four times in 2016, the latest minutes show committee members are projecting two hikes. 

Sales desks said real money accounts took advantage of the positive momentum to buy into recent issues where liquidity is higher. Axiata was a key beneficiary, with its $500 million 10-year sukuk trading in almost 20bp since it was priced on Tuesday at 240bp over Treasuries. 

Investor-friendly insolvency regulations

In its online roadshow, Shinhan estimated it had a total capital adequacy ratio (CAR) of 14.7% at the end of 2015, with a CET Tier 1 ratio of 11.9%, Tier 1 ratio of 12.5% and Tier 2 ratio of 2.2%.

The bank has the lowest Tier 2 ratio of the four Korean banks and its overall CAR has dropped from first place in 2013 to joint second behind KB Kookmin in 2015.

Korea is viewed as having some of the most investor-friendly Basel III regulations in the world, given the Financial Services Commission (FSC) has the ability to make pre-emptive capital injections before a bank's Point of Non Viability (PONV) is reached.

As Shinhan pointed out in its investor roadshow, the FSC set up a W20 trillion fund during the global financial crisis in 2008 and eventually spent W4 trillion buying up hybrid and other capital securities to bolster its financial sector. 

As a result, Moody's rates Shinhan's subordinated debt only one notch below its baseline credit assessment rather than its standard two notches in other countries where the timing of bank PONV is less certain. 

In Korea, a PONV is governed by article two of the Act on Structural Importance of the Finance Industry. This would be triggered if liabilities exceed assets, or a bank is having difficulty paying claims such as deposits. A PONV trigger would lead to full and permanent write-down of AT1 and Tier 2 debt.

Under Basel III regulations banks have to meet a minimum 8% CAR, with a minimum 4.5% CET 1 ratio, 1.5% AT1 ratio and 2% Tier 2 ratio. 

According to S&P Global Market Intelligence figures, Shinhan has a $251 million equivalent Basel II bond maturing in July and a $350 million perpetual, which is callable this month. 

Joint global co-ordinators for its new deal are: Bank of America Merrill Lynch, BNP ParibasHSBCJP MorganMizuho and Morgan Stanley.

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