Woori executes Korea's debut offshore AT1 deal

Korean bank sets a new benchmark with the lowest ever coupon for an Additional Tier 1 bank capital deal.

Woori Bank provided an important new benchmark for the Asian region on Wednesday when it completed its debut Additional Tier 1 (AT1) subordinated bank capital deal.

The transaction not only marks the first AT1 deal of the year from Asia, but is also the first of its kind from Korea. 

Korea's second largest bank is likely to be extremely happy with the result after securing a 5% coupon, the lowest on record for an AT1 Basel III-compliant deal. Only Svenska Handelsbanken and Nordea Bank have come close with 5.25% coupons for their transactions, which were both priced earlier this year and are callable in 2021.

The two European bank deals are respectively rated Baa3/BBB/BBB and BBB/BBB. Woori's AT1 issue has a lower Ba2/BB rating and was priced at par on a spread of 332.8bp over Treasuries.

The bank raised $500 million from the 144a deal, which has a slightly unusual structure encompassing a 30-year maturity, which rolls in perpetuity if the bond is not redeemed by the issuer, which has a call option at five years.

This structure was designed to comply with Korean regulations necessitating a perpetual offering, but also to entice Asian investors who tend to prefer dated maturities. A five-year call option was also chosen over a 10-year to match the typical five-year maturity profile of Korean bank senior debt.

Woori embarked on a fairly extensive roadshow to conduct price discovery and ended up with an order book of $1 billion and 73 accounts. The majority of the deal went to Asia, which took 70% of the paper, with 25% placed into the US and 5% to Europe.

By investor type, asset managers were allocated 83%, insurance companies 5%, banks 5%, private banks 5% and others 2%. 

Most of the Asian demand was from outside Korea and Europe's poor showing was not that surprising given the presence of a competing deal on the same day from Santander. The Spanish bank offered much higher yield of 7.375% for its B+/BB+ split rated £750 million issue.

It consequently attracted a much larger order book in excess of $7.5 billion. 

Differing levels of enthusiasm from Asian and European investors for Woori's deal has much to do with the performance of China's outstanding AT1 issues, which came to the market last autumn. Bankers say they have consistently traded tighter thanks to strong follow-on private banking demand from the Mainland.

One source close to the deal said European investors believed ICBC and Bank of China's AT1 issues have now traded through their theoretical value. But for Asian investors they provided the main benchmark for Woori's deal.

As such Woori had two reference points - its own Basel III compliant Tier 2 deal from last April, plus the Chinese banks' AT1 and Tier 2 debt.

Woori's outstanding Tier 2 deal comprises a Baa3/BBB- rated 4.75% 2024 bullet transaction. At Wednesday's close it was trading on a Z spread of 189bp and yield of 4.13%.

This means its AT1 deal has come at a 143.8bp premium to its Tier 2 deal. This is slightly wider than the 131bp spread differential between ICBC's AT1 and Tier 2 debt, which in turn is much tighter than the 200bp norm in Europe. 

ICBC has a 3.875% 2024 Tier 2 deal outstanding. On Wednesday, it was trading on a Z spread of 195bp, some 6bp wider than Woori's Tier 2 deal.

Its Ba2/BB rated 6% 2049 AT1 deal (callable in 2019) was bid at 326bp, 131bp wider than its Tier 2 deal and 6.5bp tighter than Woori's AT1.

Bank of China has a Baa3/BBB+ rated Tier 2 2024 deal trading at 236bp over, some 47bp wider than Woori's Tier 2. Its AT1 deal has a Ba2/BB- rating and 2049 maturity with a 2019 call option.

This is currently trading on a mid-yield of 5.24%, about 24bp wider than Woori's AT1 deal. 

Structural differences

During roadshows Woori's management argued that Korean bank capital deals deserve a pricing premium because the country's AT1 structures are far simpler, cleaner and more investor friendly than China's.

In particular they drew attention to the different regulatory interpretations of the point of non-viability (PONV), the key consideration for most investors. In China this is at the discretion of the Central Banking Regulatory Commission.

In Korea, there is no room for doubt because it is defined under Article two of the Structural Improvement of the Financial Industry Act. This is triggered when a bank's Tier 1 falls below 1.5% and its total capital adequacy (CAR) ratio below 2%.

A second big positive is the Korean government's ability to make pre-emptive capital injections before creditors have to absorb losses. As Fitch says, "We expect pre-emptive support to be provided to avoid insolvency."

In the event that a bank does reach its PONV, then investors will be subject full principal write-down. Both Tier 1 and Tier 2 debt is written down at the same time.

In China, Tier 1 investors are written down before Tier 2 and the loss absorption mechanism is equity conversion rather than principal write down. 

Korean Tier 1 and Tier 2 deals share many structural similarities, with one key difference. Korean issuers are allowed to skip coupons on their Tier 1 deals on a non-cumulative basis, but on not their Tier 2 debt. 

The rating agencies point out that coupon cancellation is normally the first corrective action a regulator would demand in the event that a bank breaches its capital ratios, a clear risk for investors. Woori's deal has a dividend stopper, which means it would also stop paying dividends at the same time. 

The Korean government is phasing in the new Basel III regulations through to 2019. By that point, banks must report a minimum common equity ratio of 4.5%, a Tier 1 ratio of 6% and an overall CAR of 10%, plus a 2.5% minimum capital conservation ratio buffer. 

Woori's need for new capital was partially determined by the merger of the bank and holding company in the fourth quarter of 2014, which weakened its overall ratios.

In a recent research report, UBS also calculated that Woori is almost the worst affected bank by the move to the new Basel III regulations because some of its hybrid capital will be disqualified. 

The Swiss bank calculated that Woori's Tier 1 ratio will drop from 10.69% to 9.4% under the new regime and its overall CAR from 14.18% to 10.45% based on end 2014 figures. Only Kyeongnam Bank stands to be worst affected, with its CAR dropping from 12.74% to 8.78%.  

Credit story

For investors evaluating Woori's credit story, one of the main unknowns concerns its future ownership. The Korea Deposit Insurance Company (KDIC) has been trying and failing to reduce its majority ownership for some time. 

This means Woori is currently acting more like a policy bank than a commercial bank. Some analysts argue that it has been hurting the bank's asset quality because it has been providing support to large corporates, which has pushed up its non-performing loans. 

Over the course of 2014, the group was also radically re-shaped and divested a number of subsidiaries, which had accounted for 40% of 2013 revenues. These included Kwangju Bank, Kyoungnam Bank, Woori Financial, Woori Asset Management and Woori Investment & Securities. 


Barclays was structuring advisor for Woori's AT1 deal and an active bookrunner alongside Bank of America Merrill Lynch, Citigroup, Commerzbank and Nomura. Passive bookrunners were BNP Paribas, Credit Agricole, Deutsche Bank and JP Morgan. Woori was co-manager. 


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