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Kexim rewards loyal investors with slightly larger concession
South Korea
Chito Santiago 12 Feb 2015

South Korea’s policy bank, Export- Import Bank of Korea (Kexim), became the first Korean issuer to tap the international bond market in 2015 as it priced on January 12 a dual-tranche bond offering totaling US$2.25 billion.

 

The SEC-registered deal comprised of US$1 billion for five years, which was priced at 99.821% with a coupon of 2.25% to offer a yield of 2.288%. This was equivalent to a spread of 90bp over the US treasuries, or at the tight end of the final price guidance of between 90bp and 95bp, and 15bp inside the initial guidance of 105bp area.

 

The other tranche was for US$1.25 billion for 10 years, which was priced at 99.483% with a coupon of 2.875% to offer a yield 2.935%. This represented a spread of 102.5bp over the US treasuries, or at the mid-point of the final price guidance of between 110bp and 100bp, and 17.5bp tighter than the initial guidance of 120bp area.

 

In accessing the bond market at this point in time, Kexim has been monitoring the market since the start of the year. However, given the heightened volatility and competing supply, it decided to wait on the sideline and monitor how the market shapes up.

 

It announced the deal in Asia morning on January 12 with an initial price guidance of 105bp area for five years and 120bp area for 10 years. Unlike in previous deals, Kexim for this issuance took a new developed market issuer approach in their execution strategy to release the final price guidance at New York open, which was intended to encourage more participation from the US investors.

“We saw the market digest good volume over the course of last week and also saw signs of stability,” notes Kexim CFO and executive director Sung-Hwan Choi. “Coming into this week, we were ready to come into the market. Seeing the Asian market with stable opening, and in the absence of major competing supply, we’ve decided the backdrop was conducive of a transaction and announced the deal in Asia morning.”

 

Kexim, as Choi points out, did not start this deal with a specific size target. However, the objective was to establish a liquid benchmark in both five years and 10 years. The order book developed with a strong momentum shortly after announcement and by Asia close, the book was multiple times oversubscribed.

 

By New York morning, when the arrangers released the final price guidance, Kexim had a clear view on the options that were available to them in terms of pricing and size. The final size of US$2.25 billion was similar with its January 2012 trade – the largest offering from a Korean issuer with the exception of the sovereign.

 

In launching a dual-tranche deal, Choi explains: “Given the recent volatility in the market, we gave a lot of thought to tenor combination. The fiveyear part of the curve has shown solid demand on the back of relative stability in the underlying benchmark rates, while the 10-year has continued to be well-bid given its appeal to absolute yield investors. Also, from the historical perspective, the five-year and 10-year have been the parts of the curve with the deepest liquidity and we thought the choice of these tenors would benefit both investors and Kexim.”

 

In terms of pricing, Kexim’s main objectives for this transaction were to discover the fair price of their bonds and price them at those levels. “If the market had demanded a premium over our secondary curve, we were prepared to pay it,” says Choi. “However, given the fact that the Korean issuers had not paid new issue premium for a long time and also given the volatility in the market in recent sessions, it was not an easy exercise to determine what the right concession would be. In the end, however, we successfully found a middle ground between what the investors anticipated and what we were prepared to pay.”

 

While Kexim had the option of doing a benchmark transaction at the tight end of the final guidance, it decided, in pricing the 10-year tranche in the mid-point of the final guidance, to leave a couple of basis points on the table for a number of reasons.

 

First, it wanted to make sure the bond performs in the secondary market. “We believed that the additional basis points would help support the bond upon break,” comments Choi. Second, a number of key investors indicated strong preference for a slightly larger concession. “We wanted our investors to know that we respect their opinions and that we would be happy to reward them for their loyalty.”

 

Finally, given the flatness of Kexim’s credit curve, they decided that the midpoint of the guidance for the 10-year tranche was still well within their perceived fair value range. “We wanted to do a market-driven deal at a level that is perceived fair by both the investors and ourselves,” says Choi.

 

The deal garnered a total order book of over US$6.1 billion with the five-year tranche attracting demand in excess of US$2.7 billion from 202 accounts. The bonds were almost evenly distributed across the region with 37% sold in Asia, 32% in the US and 31% in Europe. By type of investors, funds accounted for 44%, public entities and other investors 22%, banks 19% and insurance companies 15%.

 

The 10-year tranche generated an order book of over US$3.4 billion from 223 accounts with 54% of the bonds allocated in Asia, 31% in the US and 15% in Europe. Funds were also the biggest buyers with 41%, followed by insurance companies with 38%, public entities and other investors 13% and banks 8%.

 

Bank of America Merrill Lynch, Barclays, Citi, Deutsche Bank, HSBC, J.P. Morgan and Royal Bank of Scotland were the joint bookrunners and joint lead managers for the transaction. Samsung Securities acted as a joint lead manager.

 

The bonds were issued under Kexim’s existing US shelf programme, which was last updated on August 1 2014. The proceeds will be used for the bank’s general operations, including extending foreign-currency loans and repaying maturing debt and other obligations.

 

Kexim last tapped the US dollar bond market in August 2014 when it raised US$1 billion in two equal tranches for five years and 12 years. – CS

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