It has been so long since a Korean corporate tapped the international dollar markets, that most market participants have been hard pressed to recall the most immediate predecessor to SK Corp.
Samsung Electronics just preceded the financial crisis in September 1997 with a $493 million transaction, but in the intervening four years, the Republic's corporate sector has either been unwilling or unable to stage much of a return. For many, the domestic bond markets offered a cheaper alternative. And for those that might have considered issuing into the offshore markets, sub-investment grade credit ratings and high spreads constrained a large number, while the MoFE's reluctance to grant overseas borrowing permits, prevented the rest.
Unsurprisingly, the $250 million five year deal for SK Corp that priced in London yesterday (Tuesday) has proved extremely popular, closing just over three times subscribed. The Credit Suisse First Boston and Lehman Brothers-led deal was priced at 99.462% with a coupon of 7.5% to yield 255bp over Treasuries.
At these levels, it has come 10bp inside the nearest comparable: a 7.875% July 2006 transaction for LG Caltex, trading 245bp at the deal's pricing. Given the illiquidity of the latter deal, however, a number of bankers have benchmarked the new deal off Korea Telecom's (KT) 7.5% June 2006 transaction, which does trade and was quoted at 225bp/210bp.
A 30bp differential between the two represents no mean feat, given that KT's Baa2/BBB credit rating is constrained by the sovereign ceiling and stands one notch higher than SK Corp's Baa3 level. Bankers also report that one of the most interesting features of the transaction was that the order book held firm as indicative pricing was pushed tighter from 166bp over Treasuries.
Of the $836 million book, there was said to be an 85%/15% split between Asia and Europe in terms of demand and an 80% /20% split in terms of allocation. Non-Japan Asia was allocated 60%, with Europe 20%, Korea 15% and Japan 5%.
By investor type, the book split 75% funds, 15% insurance managers, 8% banks and 2% retail. In total, there were said to be six orders over $25 million and four above $50 million. Most were also cross over and high grade accounts rather than emerging markets. Some 71 were counted in total.
"Some of the European accounts had not invested in Korea before," comments CSFB syndicate official Chris Tuffey, " and of those that did, we mainly saw investment grade funds with room for triple-B paper. It was all cash too, no switches."
Indeed, with the Republic's benchmark 2008 bond trading at 145bp/135bp, investors willingly embraced a corporate bond offering some yield pick-up from what are considered exceptionally tight levels. However, as Merrill Lynch puts it in a recent research note, "While Asian spreads have made little sense in a global comparison for some time, it is a brave investor that shorts them given the market's strong technical dynamics."
For SK Corp, the deal was viewed as a means of diversifying the company's investor base and flying the flag for Korea. Says CFO Kim Chang Geun, "We are very proud to become the first Korean issuer since the financial crisis. We think the most important thing we have achieved is to re-inforce the credibility of Korea's business society. Pricing of Korean paper is getting tighter and tighter because our business culture has more and more credibility with investors."
The company would further have been attracted by the opportunity to re-finance existing debt at tight spreads and low yields, with expectations of a strengthening Won also taken into positive consideration.
As of end 2000, the company had W6.4 trillion in outstanding debt, of which W3.3 trillion consisted of short-term debt and W3.1 trillion long-term debt. In its ratings assessment, Moody's applauded the company's efforts to reduce its debt burden through asset sales and rights offerings.
However it also said that, "The company's interest coverage and cash flow, as a percentage of total debt, remain weak compared with its more highly rated peers. An upgrade in SK's ratings would depend upon management's success in further reducing the company's financial leverage."
This may yet happen soon, with the company publicly stating that it hopes to cut overall debt with the sale of a W2 trillion stake in SK Telecom.