the-rok-keeps-on-rockin

The RoK keeps on rockin'

Korea prices a new dual-tranche sovereign bond inside of its existing yield curve.
The Republic of Korea (RoK) returned to the international debt markets for the first time in just over a year last night (November 30) with a $1 billion equivalent dual-tranche global bond offering.

Under the lead management of Barclays Capital, Citigroup, Credit Suisse and Korea Development Bank, the A3/A/A+ rated Republic priced a $500 million 10-year bond and Ç375 million 15-year deal adding further to its curve across both currencies.

The 10-year SEC-registered deal was priced at 99.583% with a coupon of 5.125% to yield 5.179%. This equates to 69.6bp over Treasuries or 22bp over mid-swaps.

The 15-year euro deal came at 99.902% with a coupon of 4.25% to yield at 4.259%, equating to 57.4bp over Bunds or 25bp over mid-swaps.

The deal built up substantial demand with the final order book exceeding the $2.5 billion mark, with a total of 96 investors being allocated paper.

The shorter dated dollar-denominated tranche attracted a total of $1.25 billion in orders from 53 accounts. Geographically that book broke down with 55% heading into Europe, 28% into Asia and the remaining 17% into the US. By investor type, 69% of the orders came from banks, while asset managers accounted for the other 31%.

The Ç375 million 15-year tranche closed with an order book worth Ç1 billion ($1.32 billion) from 43 accounts. Geographically, 78% of the deal went to European accounts, Asian investors accounted for 17%, with 5% heading to the US. Again the majority of the orders were from banks, which took down 67% of the book. Asset managers took 17%, insurance companies 8%, while the remaining 8% went to central banks.

Specialists note that the new deal prices right through the sovereignÆs outstanding curves on a like-for-like basis bearing in mind that this if the RepublicÆs fourth consecutive $1 billion annual benchmark; the market is not short of relevant comparables.

Bankers primarily pointed to KoreaÆs 4.875% 2014s as a key comparable; that deal is currently being quoted at 23bp over asset swaps.

Korea has a 2013 which was quoted at 64bp over Treasuries or 19bp over asset swaps, and a 5.625% 2025 deal which was trading at the 84bp over Treasuries or 31.5bp over asset swaps level.

Additionally the Republic has a 3.625% 2015 euro benchmark, which bankers quoted at 40bp over Bunds, or 18bp over Libor.

The success of the deal once again highlights the sovereign as one of AsiaÆs savvier borrowers, having learned its lesson of squeezing investors for the last basis point the hard way.

In the past, by contrast, the Republic tended to adopt an extremely aggressive approach to its first international benchmarks after the financial crisis in 1998. Ignoring advice to cede a few basis points back to the market and subsequently watching the deals pop in secondary trading.

The Republic appears to have learnt its lesson and decided to take a more long-term approach with investors. "Everyone knows that the government doesn't have imminent need to raise funds in the international markets, but as it is keen to maintain a liquid and credible yield curve for other borrowers in the country it is very likely that it will come once a year," says one observer. "It's being much more sensible about how it develops its investor base."

Another notable aspect of the deal's success was the lack of impact the tense condition of the current geopolitical relationship with neighbouring North Korea. A fact only compounded by the testing of a nuclear bomb in October by the latter.

In the past, the North Korea fear factor has had a malign influence on sovereign spreads. For example, between January and March 2003 Korean sovereign spreads spiked from 120bp to 180bp. This time around, they have barely moved.
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