With the Korean investor base clamouring for yield through offshore Korean bonds, some domestic borrowers have looked to the international currency markets. Last year two Korean issuers launched fixed rate dollar bond transactions, targeting them at their domestic investor base.
In doing so, the borrowers achieved spread levels that would have been unattainable had they targeted the international investor base. Both transactions were originated and sole led by Citigroup/SSB, and have been nicknamed Kimchi bonds, after the Korean dish.
Hyundai Motor was the first to launch such a bond issue last July, when Citigroup/SSB sole led a $110m five year bond issue for the borrower. The deal was domestically launched, and provides a semi-annual coupon of 7.8%.
KorAm Bank followed when it priced a much anticipated $160m 10 year non-call five subordinated Kimchi deal through Citigroup/SSB in December. The upper tier two transaction, which was structured as a Eurobond, has a coupon of 6.95% and was priced at a spread of 284bp over US Treasuries.
This spread was 230bp tighter than where a 2010 non-call five upper tier two sub debt deal for Hanvit Bank was trading at the time.
Bankers are confident that there will be more Kimchi deals this year. "We will continue to see select borrowers being able to launch Kimchi bonds in the coming months," says Stephen Roberts, managing director and head of Asia Pacific fixed income at Citigroup/SSB.
But Roberts does not believe that borrowers will look to exclusively launch Kimchi bonds instead of offshore dollar deals, given the domestic investor demand for yield. "The domestic demand in these deals is always about $100m-$150m," he says. "For borrowers that have tenor and size requirements there will still be the need to go offshore."
Nevertheless, the number of borrowers using Kimchi deals is likely to increase this year because they are so cost effective. The transactions done for Hyundai and KorAm were about 150bp tighter than they would have been if they were sold to the international investor base.
However, while some borrowers will look to preserve their international funding lines there will also be some borrowers who are more concerned with securing cheaper funding costs. "Many borrowers are not concerned how they raise finance as long as it is cost effective," says Jang Ho Park, head of Korean debt capital markets at Citi/SSB in Seoul.
"Kimchi bonds are always cheaper than straight dollar offshore bonds, and they are sometimes tighter than dollar syndicated loans. Given that, many banks will have dollar demand that they will want to hedge against their receivables from exports."
Park adds that with the dollar Libor rate versus the won moving higher, Korean borrowers can also secure good pricing in dollars. "If the credit and the yield are good, then Kimchi bonds for $200m or even $250m could be possible," he says. *