Escalating tensions between North and South Korea have caused South Korean dollar-denominated bonds to widen an average 20 basis points (bp) in the secondary market in the last week alone. And as investor appetite waivers, bankers predict that South Korean issuers including the sovereign and Daegu Bank will delay their impending dollar bonds to await a more favourable environment.
The analysis comes eight days after North Korea declared a state of war with South Korea, raising tensions between the countries weeks after the United Nations imposed sanctions on North Korea for carrying out nuclear tests.
The market took a turn for the worst when global investors, who have generally become accustomed to North Korea’s rhetoric, reacted to announcement by Kim Jong-un will restart its facilities at its Yongbyon nuclear complex. This caused Korean bond prices to rise in the secondary market.
“It’s clearly a bad time for a Korean name to consider tapping the market,” said one debt syndicate banker. “The last Korea trade to have come out was KEB [Korea Exchange Bank]. We did that deal on March 25 and it has aggressively widened. And it’s like that for bonds from Woori and Hana – it’s clearly the whole Korean sector that has widened quite a bit, at least 20bp or so.”
Bookrunners BNP Paribas, Bank of America Merrill Lynch, Citi, HSBC and Hana Bank printed KEB’s US$350 million five-year deal at 130bp over Treasuries. That bond now trades at approximately 145bp-150bp over Treasuries, he said.
The landscape will also put pressure on Korean issuers looking to tap the primary market meaning that names such as Daegu Bank and the South Korean sovereign – which both put our requests for proposals for dollar deals at the end of March - may need to sit on their bonds until the political atmosphere becomes less charged.
“The underlining market is quite good right now and we’re even seeing names that have delayed bonds earlier this year coming out and tapping the market. But this isn’t going to extend to Korean names right now,” said one DCM banker away from both the Daegu and Korean sovereign deals. “If I were on these deals, I would say that absolutely these issuers should consider delaying their deals until at least the secondary market settles down. We have no idea when that will be, but I think investors generally expect it to wash over pretty soon, but for now this may throw a wrench in their plans.”
On April 8, Moody’s announced that escalating tensions caused North Korea’s plutonium reprocessing is a ‘credit negative’ for South Korea. Such headlines may make it even more difficult for Korean issuers, which have actively pushed for the tightest yields for their deals, to achieve their pricing targets.
“When [Daegu Bank and the Korean sovereign] went out with the trade and announced their mandate, probably a week or two ago, the rhetoric out of North Korea wasn’t that aggressive yet,” added the syndicate banker who worked on the KEB deal. “But then all this news came out of North Korea and then the entire market has taken a hit a little bit.”
Yet the environment hasn’t stopped Daegu Bank (‘A2’ Moody’s), one of South Korea’s largest regional banks, from exploring its options. A banker close to its debut dollar bond says that Daegu and bookrunners Crédit Agricole, Deutsche Bank and HSBCare meeting with Singapore-based investors on April 8 and Hong Kong-based investors on April 9. From there, the bank will decide whether the environment is ripe for an issue.
“Daegu is on a roadshow in Singapore and it’s looking pretty good. A lot of investors wanted to see the issuer,” said the banker close to the deal, declining to discuss pricing, tenor or size targets. “There’s definitely been widening of Korean bonds in the past week but I don’t think this is impacting a first-time issuer...Investors are asking about [the timing of the deal] but the thing is that it’s still a bit early to see how the deal turns out.”
Also working against Daegu is its lesser-known brand name overseas. Unlike KEB or the Export-Import Bank of Korea (Kexim), which are frequent issuers outside Korea, Daegu will be expected to pay a higher premium for its bond, making for an even more interesting case study amid the current political environment.
“A lot of these Korean deals are clearly are going to be interesting to see because for the last couple of years it has been a very good ride for them,” said the syndicate banker. “They’ve been able to print deals with no, or even a negative, premium. Now Korean risk has increased. If Daegu can come out then they will be the first big test. They are not as well-known so figuring out where this gets done, the type of pricing, and the issue spread it can achieve, then it will act as some sort of benchmark for the market.”