Since Kookmin Bank sold South Korea's first covered bond in 2009, the country's covered bond market has averaged just one transaction a year. That will change when a domestic framework comes into force later this year.
The market is, naturally, expecting full covered legislation to prompt a spate of debut deals from Korean commercial banks. The desire among bankers to see these deals come — and come successfully — has led to consternation about Korea Housing Finance Corp (KHFC). It has decided to push ahead with another covered bond before the law changes, and bankers are worried that a benchmark will be more of a hindrance than a help.
Korea’s financial regulator has high hopes for legislative covered bonds, which are part of a comprehensive attempt to address the high level of household debt plaguing an otherwise robust economy.
But if the idea is to use a legal framework to provide banks with longer-term and cheaper funding, the regulator should be doing everything in its power to support the first round of debut deals, say bankers.
In their eyes, this does not include letting KHFC, which issues under its own special framework, confuse matters with a benchmark bond that risks draining the market of liquidity before other Korean borrowers get a chance to sell deals.
But their irritation is misplaced. There is more than enough demand for KHFC to get its own deal out of the way and for a host of Korean commercial banks to follow it with their own successful deals.
Growing bid
Demand for dollar covered bonds has grown in leaps and bounds over the last few years. The slow creep of covered bonds in South Korea has brought more Asian accounts into the market. Perhaps more importantly, SEC-registered covered bonds have sparked interest among US investors.
There has not, on the other hand, been alarming supply in the dollar market, where the Korean banks are likely to issue. Canadian issuers, which account for the bulk of dollar issuance, have largely been sidelined for the last year while adapting to their own new legislation.
Korean borrowers have already drawn a new wave of dollar investors to their unsecured deals after being upgraded last year, and they are now facing a covered bond investor base that is hungry for supply and yield. They can provide both — and when their debuts hit the market later this year the reception will not be any less rousing because of a $500m — or even $1bn — bond launched six months earlier.
Quite the opposite, in fact: KHFC could be seen as providing a benefit, as it offers investors a chance to reacquaint themselves with Korean risk. The borrower may be issuing under a soon to be obsolete framework but it is using residential mortgages from other Korean banks as collateral. This is exactly what investors will be exposing themselves to in six months time, and they have an early opportunity to familiarise themselves with the sovereign, the banking system and the mortgage market ahead of the first wave of legislative transactions.
It is understandable for bankers to be wary about disturbing what could be a lucrative source of revenues. But so long as KHFC does not pay through the roof for its next dollar deal, there should be no negative impact on the first round of legislative covered bonds from Korea. It might even help.