Woori, Shinhan and Hyundai Motor presage new Korean deluge

Korea''s second and third largest banks launch roadshows for their latest debt financings.

Leading what is expected to be an extremely active autumn pipeline from Korea, Woori, Shinhan and possibly the Korea Development Bank are hoping to raise up to $1.75 billion within the next week.

Woori Bank seems likely to price first as it launches short roadshows today (Friday) in Singapore for a $300 million to $500 million senior deal. Presentations will continue in Hong Kong on Monday and London on Tuesday, with pricing tentatively scheduled for later the same day.

The deal will have a five-year maturity and under the lead management of ABN AMRO and Merrill Lynch, the Baa2/BBB- rated bank is said to be hoping to maximise proceeds. The most obvious pricing benchmark is its 4.5% October 2007 bond, which is currently yielding about 130bp over Libor.

Pricing is likely to be complicated, however, by Shinhan Bank, whose upper tier 2 deal will carry the same rating as Woori, but looks likely to come about 50bp to 60bp wider on a Libor basis. For many investors, particularly those from Korea, Shinhan's structural subordination may matter less than the prospect of enhanced yield.

Counterbalancing this, Woori is on an upwards ratings trajectory and since its last deal in October 2002 has achieved full investment grade status from both Moody's and Standard & Poor's. Some now believe it will jump a further notch over the next six months, in the process closing the spread gap with comparables such as Shinhan.

The latter, currently rated one notch higher at Baa1/BBB, has a July 2008 FRN trading at about 100bp over Libor. This is some 30bp tighter than Woori’s October 2007 issue and also nine months longer.

Shinhan Bank itself will begin roadshows in Singapore on Tuesday for a $250 million 10 non-call five upper tier 2 deal. Under the lead management of Barclays and Citibank, presentations will move to Hong Kong on Wednesday, with pricing scheduled for either Thursday or Friday.

The transaction was mandated earlier this year, but has remained on hold until the holding company undertook the financing associated with its W2.7 trillion acquisition of an 80% stake in Cho Hung. This was completed under the lead of JPMorgan last week and has had no material impact on the capital ratios of Shinhan Bank.

Likewise, a $150 million to $200 million lower tier 2 issue for Cho Hung Bank should now re-materialise under the lead management of Citigroup. This was also put on hold, but will remain necessary, as Cho Hung is to retain separate capital ratios for a few years after the merger.

Shinhan's $250 million deal marks its debut subordinated debt transaction and will rank as the highest rated upper tier 2 deal by a Korean bank. The issue will have a Baa2 rating from Moody's and a BBB- rating from Fitch. There will be no S&P rating, as the bank was recently downgraded by the agency and its notching policy would mean that an upper tier 2 rating would fall into non-investment grade territory.

There are few obvious pricing comparables since Hanvit, Cho Hung and Korea First Bank all have much lower non-investment grade ratings. As such, market participants have heard indicative pricing as tight as 175bp over Libor and as wide as 230bp over.

Some investors are said to be looking at Hana Bank's hybrid tier 1 issue as a rough guide. On a senior basis, the bank is rated one notch lower than Shinhan and its 8.745% December 2012 issue is currently trading at about 315bp over Libor.

Taking Hana as a guide, Shinhan should price between 180bp to 200bp over Libor. FIG experts say this takes into account a four-year maturity differential between Hana's outstanding deal and Shinhan's proposed deal, plus a 50bp to 75bp differential between upper tier 2 and hybrid tier 1.

The differential between the two securities is normally a lot larger, because hybrids typically have perpetual structures. However, Korea is one of the few international jurisdictions, which allows dated structures for both hybrids and upper tier 2 debt.

As of end June, Shinhan had an overall CAR of 10.1% down from 10.9% at the beginning of the year. The Korean authorities impose a 10% minimum threshold on the banking sector and analysts say Shinhan wants to raise additional capital to buffer itself against increased provisioning.

At the end of June, for example, the bank reported a 50% drop in net profit to Won152 billion. This was mainly because of a 167% jump in provisions associated with the SK group and problems with its credit card division.

Nevertheless, its new deal is expected to go well as the bank has greater rarity value than some of its comparables and onshore demand has re-surfaced following tightening in the cross currency basis swap. Following its merger with Cho Hung, Shinhan will also jump over Woori and stand second to Kookmin as Korea's second largest bank by assets ($112 billion).

The major variable affecting both Woori and Shinhan will be KDB. The government-owned policy bank remains waiting in the wings with a $500 million 10-year issue and Eu500 million five-year issue via Barclays, Credit Suisse First Boston, HSBC and JPMorgan.

Having completed roadshows just ahead of the summer break, KDB is looking for a window to come back on an accelerated basis and bankers say that if it does not come next week, it will have to wait until the third week of September because of holidays in Korea during the intervening period.

A $300 million issue for Hyundai Motor will also begin roadshows next week despite rumours that it had been pulled. Led by Credit Suisse First Boston, JPMorgan and Morgan Stanley, the company will begin presentations in Hong Kong on Tuesday followed by Singapore and Boston on Wednesday and London and New York on Friday. The deal will have a five-year maturity and a make whole call option. Proceeds are being used to re-finance an exchangeable into Kia Motors, which redeemed in August.

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