Shinhan shines

Big order book for rare hybrid deal.

Shinhan Bank launched a debut hybrid tier 1 deal yesterday (February 23) raising $300 million via Barclays, BNP Paribas and Merrill Lynch. The extendible 30-year, with a call option in year 10, was priced at par on a coupon of 5.663% to yield 138bp over Treasuries or 99bp over Libor. Fees are 75bp.

The deal attracted a mammoth order book of $3.2 billion and participation from 150 accounts, of which more than 100 were allocated paper. Pricing was tightened in from initial guidance of 145bp over Treasuries, but even at the final issue price, most observers believed there was considerable scope for further tightening during secondary market trading.

Korean sub debt paper has historically well rewarded investors and even though current spreads are at record tight levels, they still offer a yield kicker relative to the outstanding hybrid universe. As one FIG specialist puts it, "Most European hybrid deals are higher rated than the Korean bank deals and therefore trade at much tighter levels. Now the Korean bank sub debt deals are mostly investment grade rated, they have a huge advantage. They're considered a safe investment, but give investors a nice yield kicker."

Shinhan's deal marks the third hybrid from Korea and its two predecessors provide the main pricing benchmarks. A 8.748% perpetual non-call 10 year issued by Hana Bank in December 2002 is currently bid at 120.5% to yield 101bp over Libor.

Specialists believe the maturity differential is worth about 10bp. This means Shinhan has priced about 12bp through Hana even though they have the same effective rating from the agencies. Shinhan's tier 1 deal has been assigned a Baa3/BB+/BBB- rating (Moody's/Standard & Poor's/Fitch).

However, Hana's deal is considered cheap by a number of FIG specialists. Partly this is a legacy of its small size $200 million and its structure. The deal was launched before the FSS allowed dated onshore issues and it had to be issued via a Special Purpose Trust (SPV). Together the SPV and perpetual maturity would necessitate a slight premium.

The second major comparable - a $300 million deal by Korea First Bank was only issued a year ago and has performed spectacularly well since then. The 7.267% extendible 30-year with a call option in March 2014 was priced at 325bp over Treasuries or 286bp over Libor. Today it is trading at 112.63% to yield 95bp over Libor, a tightening of 191bp.

The deal has a slightly weaker rating than Shinhan - Ba1/BB/BBB- (Moody's/S&P/Fitch) - but it is trading tigher than Shinhan because of the halo effect of its new owner Standard Chartered. Bankers say it has also tightened about 5bp since Shinhan released price guidance.

Shinhan' third major benchmark is its own upper tier 2 deal - a $250 million 6.25% September 2013 deal callable in 2008. This is currently trading at 60bp over Libor and has also performed well since late October when its sister bank - Cho Hung - raised upper and lower tier 2 debt. At that point it was trading at 111bp over Libor.

The 39bp differential between Shinhan's hybrid and upper tier 2 debt is exactly the same differential that KFB's hybrid and upper tier 2 debt deals are trading at.

Bankers say allocating the Reg S deal was a nightmare. Unusually, a significant demand driver was Europe, although this is less surprising in the context of a non-deal roadshow Shinhan undertook late last year and the dominance of European banks in the syndicate.

Geographical splits show that Europe took 43%, Asia, 45% and offshore US the remaining 12%. Korea only accounted for about 2%.

By investor type, banks and private banks accounted for 51%, asset managers 42% and insurance companies 7%.

Shinhan Bank is Korea's fourth largest by assets, though when combined with Cho Hung, the Shinhan Financial group ranks second. Pre-deal the bank had an overall CAR of 11.6%.

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