Woori prepares AT1 ahead of Fed meeting

South Korea's second-largest lender set to print new additional tier one debt, turning to the market on the cusp of a crucial interest rate meeting in the US.

Woori Bank is poised to become the first South Korean bank to raise additional tier one capital this year, turning to investors only a day before a crucial interest rate decision in the United States.

Woori wants to return to the bond market on Tuesday, just a day before the US Federal Reserve decides whether or not to hike interest rates.

Bankers were reticent about the choice of timing, but appeared confident Woori would be able to get a deal away despite the inevitable rise in volatility around monetary policy meetings.

They think Woori will be helped by the fact that it is a repeat visitor to the market, having sold a $500 million AT1 deal last June. That makes pricing discussions easier for both investors and funding officials.

Woori’s outstanding non-call five year bond is callable in June 2020 and was trading at a yield-to-call of 3.76% on Monday afternoon. But although it is a good comparable for the new issue, there is a slight difference.

While both are callable after five years, Woori’s latest transaction will come with the standard perpetual maturity. Its debut issue had an unusual 30-year maturity structure, which rolls into perpetuity if the bond is not redeemed by the issuer. The structure was designed to balance a regulatory need to issue a perpetual with the desire to show investors they would almost certainly get their money back after 30 years.

The outstanding deal is not the only comparable. One syndicate banker said DBS's $750 million AT1 bond issued in late August and ICBC's $1 billion AT1 note in July will both be included in fair value discussions. The former was trading on a yield-to-call of 3.638% on Tuesday, while the latter was yielding 4.393%, according to a market source.

Tough times for the sector

Woori will not have a simple route to the market. Korean banks are not in vogue at the moment. In a April note by Moody's, the rating agency said the overall credit worthiness of Korean banks will deteriorate between the next 12 to 18 months. The operating environment for banks is getting worse amid Korea's diminished growth outlook and ongoing financial sector reform, it said.

"We expect ongoing restructuring at Korean corporations will result in rising credit charges, in turn weakening the banks' capital ratios," analysts at Moody's wrote. "Profitability will decline further in 2016 on the back of lower interest income."

Woori, South Korea's second-largest lender by assets, is also coming to the market less than a week after State Bank of India sold its country’s first AT1 bond. SBI raised $300 million, but aggressive price guidance meant demand was subdued. Still, bankers say they are confident that Woori will get a stronger result.

The size of the transaction is yet to be determined, said bankers. But funding officials at Woori should have a good idea — they have already met investors on an extensive roadshow in Asia, the US and Europe. A benchmark deal is expected, said a banker.

Most economists think the US Federal Reserve will hold interest rates on Wednesday, despite rising inflation in the country. The Bank of Japan's monetary policy board is also set to meet on Wednesday,   adding another risk factor to investors in the global market.

Bank of America Merrill Lynch, Citigroup, Commerzbank, Crédit Agricole CIB, HSBC and Nomura are active managers running the deal, while BNP Paribas and Morgan Stanley are passive bookrunners. Woori Global Markets Asia is a co-manager.

¬ Haymarket Media Limited. All rights reserved.
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