Woori’s AT1 debt gets tepid response

South Korea's second-biggest lender taps bond market ahead of US Fed's interest rate decision but finds a poor reception from investors.

Woori Bank, the second-largest lender in Korea, priced a $500 million additional tier-1 (AT1) bond at a yield of 4.5% on Tuesday night. But the bank's decision to come to the market ahead of a US interest rate decision appeared to have limited demand for the deal.

The perpetual non-call five deal proved challenging for the leads – Citi, Commerz, Credit Agricole, HSBC, Bank of America Merrill Lynch and Nomura – as investors remained on the sidelines to await the outcome of policy meetings from the US Federal Reserve and Bank of Japan, while some fatigue had settled into the bank capital class as a whole.

The syndicate banks built a final order book of $850 million from 76 accounts, a level some investors said meant the new AT1 print was smaller than they had predicted given the 144A format.

That contrasted with what Woori achieved in its debut AT1 print in June last year, when the A2/A-rated lender garnered more than $1 billion of orders for the first AT1 of the year from Asia.

In the secondary market on Wednesday, the bonds were trading on a cash price of 99.625/99.875, implying a yield of 4.585/4.528%. Bond price and yield move inversely to each other.

However, the level of caution does not only apply to Woori's bank capital offering. State Bank of India, a Baa3/BBB/BBB-rated lender, last week managed to capture peak demand of $700 million for the country’s first US dollar-denominated AT1 issue. The lacklustre demand led the country’s largest commercial bank to issue a $300 million bond in the end, down from its original target of $500 million.

One of the syndicate bankers running the Woori deal said subdued market conditions had somewhat curbed investors’ interest in the Basel III-compliant paper.

“The market dynamics have been the major factor behind it because investors are waiting to see the decisions by the Fed and BoJ,” the person said.

On a brighter note, he added, the latest Woori bond was the first by a repeat issuer in the region, potentially prompting more financial institutions to follow suit. “The issuer was happy about the final outcome as it reset the spread of its outstanding AT1,” the person said.

“The real money investors are muscling in on the deal as the spread was attractive,” the person added.

By investor type, fund managers took up 71%, while insurance accounted for 24%; the remaining 5% went to banks, private banks and others. By geography, Asia took up 60%, while Europe took 20% and the US 20%.

A recent sell-off in sovereign bond markets, sparked when ECB chief Mario Draghi disappointed investors by holding its bond-buying programme unchanged, has continued to wane.

A Singapore-based fund manager said a lot of recent primary deals performed poorly in the secondary market because of the sell-off in long-dated bonds from Japan to Europe.

"We have seen a bearish steepening of the yield curve across the board," the person said.

BNP Paribas and Morgan Stanley were passive bookrunners. Woori Global Markets Asia was a co-manager.

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