Emerging market currencies in Asia are an increasingly important source of funding for Korean issuers and some companies may issue in Thai baht or Malaysian ringgit later this year regardless of the fact that weakening currencies mean funding is relatively unattractive on an afterswap basis.
This month Thai Ministry of Finance (MoF) granted permission to four Korean entities to issue Thai baht denominated bonds between September 1 this year, and May 31, 2014.
The Export Import Bank of Korea (Kexim) has a quota of THB12 billion (US$376 million), Korea Finance Corporation (KoFC) has been given a THB10 billion quota and Korea Development Bank (KDB) and Korea Gas Corporation (Kogas) can each raise up to THB8 billion.
Ordinarily, this would be welcomed by the issues, particularly as the MoF vetoed all Korean applications in its previous round of approvals, due to fears that political issues would impact market stability.
But over the past few months, the Thai currency has weakened due to capital outflows from emerging markets, over concerns that easy monetary policy in the US is coming to an end. The baht fell from THB29.89 to the US dollar on May 22, to a low of THB32.24 on September 6, according to Bloomberg data.
This means that the afterswap cost is unattractive to Korean issuers, who tend to swap the proceeds from their THB fundraising into US dollars.
“Diversifying currencies is one of our main funding strategies and we are monitoring various currency markets in Asia. Owing to concerns over QE tapering, emerging markets recently seem to be less attractive than USD markets,” said Dae-yong Jung, senior finance officer in the international finance department at Kexim. Bankers say this is the case across the board.
“The THB bond market has become quite important to the active Korean issuers, but given the recent weakness in selective Asian currencies the basis has worsened so it no longer gives a cost benefit at this stage,” said Sangho Rhee, head of Korea DCM at HSBC.
“Also, traditionally from a direct funding perspective, the ringgit has been one of the more opportunistic funding lines but the pricing is too wide so they are not looking at that.”
This could potentially pose a problem, said bankers. Kexim, for example, is in need of around US$10 billion a year and for that level of issuance, funding diversification is important. Sometimes the bank needs long-tenor funding, and the THB market can support up to 12 years. Kogas and KTB are also in need of diversification of their funding sources because they are increasing their overseas business.
At the moment the US dollar market looks much more attractive for Korean names. The Korean sovereign sold a US$1 billion 10-year deal at 115 basis points (bp) over US Treasuries (USTs) on September 4.
Korea Development Bank swiftly followed, pricing a US$750 million 5.5 year-bond on September 10, according to EuroWeek Asia. The policy bank had announced guidance at 155bp over USTs but this was tightened to a 140bp spread – 3bp inside the existing curve. This meant KDB paid a negative new issue premium.
But according to reports, up to 12 more Korean issuers are looking to come to the US dollar market, with Kexim next in line. This could lead to oversupply risks and mean that companies have to go back to markets such as the THB and MYR.
“In the dollar pipeline there is a huge queue from Korea, it will interesting to see whether all this will be digested,” said one Korea head of DCM at an international bank.
“All the issuers who could have access to the USD market will prioritise that, but if that doesn’t go well – and I mentioned this huge backlog of supply – if the levels widen out during the course then relatively speaking Thai baht could look more competitive than USD,” he said.
Plenty of options
However, Korean issuers have plenty of avenues of funding available to them. At the moment, the most attractive currencies are Australian dollars, euros and Swiss francs, said bankers. Korea Finance Corporation has just priced a five-year deal in Swiss francs inside its US dollar curve.
“The AUD makes sense from an after-swap perspective – there is around a 5bp saving versus USD. The euro has been providing about 10bp or 15bp in hypothetical arbitrage versus US dollar levels but recently the USD market has rallied for Korean names so it’s about par, or 5bp in savings on the five-year. But if you go longer then USD is more attractive,” said Rhee.
The CNH market is the million-dollar question, according to bankers. There are a few Korean issuers, including Korea Finance Corporation, that have been looking at RMB funding.
“The basis improved but then it worsened, and the absolute yield has gone up because of onshore liquidity concerns. CNH funding is at least 20bp to 30bp worse than USD from an issuer’s perspective. If there was a CNH trade announced most likely it will be for repatriation onshore, but there are not many of those as most of the Korean issuers look at the market on an afterswap basis,” said one Seoul based DCM head.
The Samurai market is effectively closed as on an afterswap basis it is not compellingly competitive versus USD, said the head of Korea DCM. For private placements, Hong Kong dollars provide good liquidity and that is still looking very attractive. Korean issuers can also consider Singapore dollars but the absolute yield requirement is not looking good on an afterswap basis.