Export-Import Bank of Korea’s deal will pave the way for more Korean issuers to tap the UK bond market after the state-run lender was able to break the lull of Korean issuance with the its first senior, unsecured sterling bond issue.
The policy bank, which is also referred to as Kexim, sold a £300 million (US$453 million), three-year bond at 70 basis points (bp) over Libor on March 17. Deutsche Bank and RBS were the bookrunners and Kexim served as the lead manager of the deal. The proceeds were swapped back to US dollars at a basis swap that resulted in the bank having to pay 10bp more in all-in costs for this deal that if they were to borrow in US dollars.
A senior funding official at state-run Korea Finance Corp told Asiamoney PLUS last month that it is also closely watching the sterling bond market due to improving swap levels and the need for diversification.
Kexim’s deal is the first public bond deal from a Korean issuer in the sterling market, according to a senior funding official, who added that this deal came after several unsuccessful attempts in pricing. The only other activity came from Korea Development Bank and Korea Electric Power Corp, which issued sterling private placements in 1997 and 2006, according to Dealogic.
“It’s meaningful that Kexim is doing this deal in Europe representing the Koreans,” said a debt syndicate banker away from the deal. “Even if they have to pay more, it’s really a difference of running 100 meters versus 105 meters.”
The sterling bond market has been traditionally open to mostly well-known Japanese issuers such as Export-Import Bank of Japan, Sumitomo Mitsui Trust Holdings, Shinsei Bank and Toyota Motor Credit Corp, according to Dealogic. Sumitomo Mitsui Banking Corp is the only Japanese issuer to sell in the sterling market so far this year through a £250 million deal maturing in 2016.
Non-Japan issuers include supra-nationals such as the Asia Development Bank and Temasek Financial in 2010.
ICICI Bank was the last commercial bank from Asia ex-Japan to issue in the sterling market through its Bahrain branch in 2007, while Reliance Industries was the only private company to tap UK investors through the pound bond market in a deal completed in 1997, according to Dealogic data.
“UK investors are known to be conservative. Especially after the global financial crisis, they’ve become even more selective and have really closed their wallets to most of the Asian issuers except for the Japanese,” said the Kexim funding official.
The ability to price in the market amid this cautious sentiment represents the confidence that UK investors have over the policy bank, added the official, who said the deal is bound to open doors for more Korean credits to come. South Korea was upgraded to ‘Aa3’ by Moody’s on August 28 due to its strong fiscal position and economic outlook, as well as its prudential management of the banking system. That effectively raised the ratings of other state-backed entities such as Kexim and Korea Finance Corp to the same credit standing.
Yet the category of issuers that can tap into the UK bond market will probably be limited to credits that have state links.
“This deal will set the terms for more Korean issuers to come and price deals successfully,” said the funding official. “But because UK investors are really much more conservative, they’ll really look at the high investment-grade credits. State-run companies do have the advantage.”
Possible issuers include policy banks or state-owned lenders with large funding programmes the way Kexim does, according to another bank away from the deal. However, the banker added that a lot of those issuers may be interested in longer tenors such as five years whereas Asian issuers have sold sterling bonds mainly through three-year deals.
However, UK investor demand for Asian corporate is strong and the Kexim deal may kick off interest in that sector, said the banker.
“You’ll see quite a lot of demand for Asian corporates in the 10-year curve and beyond, as we have seen in the Ozzie corporate world,” said the debt syndicate banker. “For 10-year plus deals and I think single-A rated corporate issuers, there will be demand for them, specifically the more well-known ones.”
Another debt syndicate banker added that diversification is an important factor for a bank like Kexim unlike the other Korean commercial banks because of the sheer size of issuance it needs to complete annually.
“These guys [Kexim] needs to amass US$10 billion, but we’re only talking 1-2 billion max for the commercial banks,” said the banker. “If the commercial banks are looking for a favourable European currency, the Swiss franc market will probably suit them better because they’ve issued there before.”
Kexim plans to issue US$4 billion in US dollars, US$3 billion in non-US dollars and US$3 billion in bank loans and private placements this year, according to Lee Sang Ho, director of Kexim’s international finance department, during an interview with Asiamoney PLUS in January.