South Korea’s Hana Bank on September 25 priced its inaugural Basel III-compliant bank capital transaction. With the US$300 million tier 2 notes, it is now only the second bank from South Korea to tap the US dollar market for issuing Basel III compliant bonds.

Woori Bank in April priced the country’s first Basel III-compliant bank capital transaction raising US$1 billion from a 10-year bullet structure from Asia.

Hana’s 10-year notes were priced at a spread of 195bp over the prevailing 10-year US treasury, representing 30bp tighter than secondary trading levels of comparable Korean commercial bank subordinated bonds, the company says in a statement. Among the recent subordinated bond offerings from Korean commercial banks, the offering was priced at the lowest spread.

This transaction marks the first ever Basel III-compliant subordinated issuance with investment grade ratings from two international credit rating agencies (Moody’s and Standard & Poor’s) on Korean commercial banks.

The bonds have contractual non-viability loss absorption provisions, meaning these will be fully written down in the event the bank is designated as an “insolvent financial institution” by the Financial Services Commission (FSC) or the Deposit Insurance Committee, and pursuant to the Act on the Structural Improvement of the Financial Industry.

The deal garnered robust interest from high quality investors across Asia, Europe and the US, with final order book of over US$2 billion from 150 accounts. Allocation was made 51% to the US, 41% to Asia and 8% to Europe. By type of investors, 69% was allocated to fund managers, 16% to insurance companies and pension funds, 7% each to sovereign wealth funds and banks, and 1% to private banks.

Hana attributes the success of the deal to the support it received from the ministry of strategy and finance as well as the FSC and Financial Supervisory Service, which helped the bank to receive favourable credit ratings from international credit rating agencies. Positive reaction from international investors towards Hana Bank’s early integration with Korea Exchange Bank also contributed to a good outcome, the bank adds.

Moody’s assigned a Baa2 rating to the notes, positioning it one notch below the bank’s adjusted BCA (baseline credit assessment) ratings of Baa1.

“The (P) Baa2 ratings are positioned one notch below the adjusted BCA, despite its full write-down feature. This is because of our view that the probability the non-viability event would be invoked is lower than that measured by the BCA, thereby mitigating the high level of loss given default,” notes Hyun Hee Park, Moody’s assistant vice-president and analyst.

The BCA measures the likelihood that a bank would default, or would fail without extraordinary support, and captures a broader range of scenarios than envisaged in the definition of a non-viability event.

Barclays, Commerzbank, J.P. Morgan, Societe Generale CIB, Standard Chartered and UBS were joint lead managers for the deal.