SK Corp reopens the taps for Asia's international debt markets

Korean refinery looks to mend fences with investors with new $300 million bond offering.
KoreaÆs largest oil refiner, SK Corp, priced a $300 million five-year bond offering on Tuesday (May 16) at the tight end of revised guidance. The deal, lead jointly by Korea Development Bank, Morgan Stanley and UBS represents SK CorpÆs return to the international bond market and possibly the reopening of the market after three weeks of relative scarcity.

Initial guidance for the Reg S transaction was released last week at mid-swaps plus 67bp; however as the deal gathered momentum the leads tightened guidance to 63bp to 65bp over.

This is a borrower whose history many bond investors were mindful of. Its chairman Chey Tae-won was convicted in 2003 of accounting fraud related to SK subsidiary SK Global, and the company later got into a battle with Sovereign Asset Management over corporate governance. However, as detailed in a FinanceAsia magazine cover story last year, the company has endeavoured to implement reforms and later won foreign shareholder approval for its strong dividend policy and financial performance - which incorporated the paying down of debt.

Its return to the capital markets was greeted with enthusiasm. The deal built up an impressive order book and priced inside of benchmark LG ElectronicsÆ implied curve. At time of pricing 10-year treasuries had pushed out to 5.18%.

Final pricing came at 98.908 on a coupon of 5.875%, giving a yield of 5.031%, which equated to 63bp over mid-swaps or 110 over five year Treasuries.

The order book closed at four times oversubscribed, with a total of 53 accounts allocated paper. Geographically the deal garnered heavy support out of Korea, which bought 60% of the total book. Other Asian accounts took 35% and the remaining 7% went to Europe.

In terms of account type, 71% went to banks, 12% funds, 8% insurers, 7% agencies, and 2% others.

Heading into the deal bankers were looking at fellow Korean Baa3/BBB- LG Electronics, which has a 2010 deal that is currently trading at bid/offer spread of 101bp to 107bp over treasuries or 65bp over mid-swaps. With the one year extension and the new issue premium, estimated to be worth about 4bp to 5bp, that means the new SK offering prices 3bp inside of the LG Electronics existing deal.

Another comparable cited by bankers was SK CorpÆs own credit default swap, which had tightened in recent days to 60bp to 65bp over.

ôItÆs a good deal for both parties, investors get cheap refinery risk, which is fair in light of the current market environment,ô says one investment banker. ôOn the other hand, the borrower managed to achieve relatively tight pricing.ö

The deal got a boost in the run up to pricing when MoodyÆs followed S&PÆs lead and promoted SK Corp to investment grade status with an upgrade to Baa3 on May 10. Standard & PoorÆs had raised its rating to BBB- in late February.

MoodyÆs cited SK CorpÆs leading position as Korea largest refinery, its expectation of strong systemic support and the companyÆs strong profitability measures, which will benefit from its vertically integrated operations and SK CorpÆs large refining capacity, which are further enhanced by the recent acquisition of Inchon Oil.

In March, SK Corp completed the W3 trillion ($3.1 billion) purchase of the bankrupt oil refiner, making it the fourth largest in Asia. It also has the largest number of petrol stations in Korea, as well as an expanding portfolio of E&P assets around the world - and most recently signed a JV with Pertamina to set up a lubricants plant in Indonesia.

On the downside, SK Corp is subject to the effect that increasing oil prices and the cyclical nature of the petrochemical industry will have on its overall cashflow and earnings - since SK Corp relies heavily on foreign oil supplies and faces substantial price fluctuation risk. It moderates these inherent risks, however, through long term supply contracts and increased investment in exploration and production ventures.

This is a good result for a borrower that has been keen to repair its reputation with investors.
There were obvious concerns from investors during the roadshows regarding the companyÆs problematic corporate governance track record; however the lead banks needed only to point to the Korea Corporate Governance survey, where SK placed in the top 10 in terms of governance standards in 2005. Moreover, MoodyÆs cited the companyÆs focus on corporate governance as an upward rating trend.

Additionally, the company has been one of KoreaÆs best performers this year, having traded up 25% since January, making it the seventh best performer on the Korean stock exchange.

Fundamentally SK Corp is a strong credit; its first quarter net debt to equity was a safe 73.8%. However, because of the recent purchase of Inchon (now rebranded SK Inchon Oil) SK CorpÆs net debt to equity has increased by roughly 20%. On a consolidated basis, SK CorpÆs has a total debt to EBITDA ratio of 1.8 times and a total debt to capital of 45%.

The funds will be used to refinance an existing $250 million bond that matures at the end of the month.
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