The Samurai bond market is set to become more favourable in the second half of 2013 as Japan’s monetary stimulus increases onshore liquidity that will allow Korean issuers to drive down funding costs.
The dollar market is the most coveted market for Korean issuers at the moment. Bankers say most ofthe pipeline in the second quarter, including state-owned companies such as Korea Resources Corporation and banks such as Korea Exchange Bank, will be issuing dollar-denominated bonds because that market is the cheapest among all foreign currencies for now.
Currently, it is 20 basis points (bp) cheaper for Korean issuers to tap the dollar market over the Samurai market, said a Hong Kong-based debt syndicate banker.
However, the difference in funding costs in dollars versus yen has been narrowing in the past few months from 50-60bp, according to a funding official at a major Korean commercial bank, which means that it is becoming cheaper for issuers to sell bonds in the Samurai market. That is leading bankers to look more closely into issuing in Samurai.
“The cost difference in issuing in dollars versus yen is going to narrow towards the second half of this year, so I am positive about that prospect,” according to a Hong Kong-based debt syndicate banker.
Plans by the Japanese government to increase bond buying schemes will also boost liquidity levels, which will help Korean issuers drive down funding costs further when they price the deals, added the banker.
The usual suspects, such as South Korea’s policy banks and commercial lenders, will take advantage of such a market environment, the banker added. A funding official at Busan Bank said it will also consider the Samurai market in the fourth quarter.
The Samurai market is a coveted market for banks especially because they can print in short-term tenors, said a funding official at a Korean commercial bank.
“Usually maturities are in the two-year and three-year space in Samurai, but dollar markets need to be at least in five-years. These shorter maturities give banks more flexibility to match their asset liabilities.”
It is this upside that smaller Korean banks wish to take advantage of in addition to diversification purposes. NH Bank is hoping to make its debut this year.
“This is why we would like to issue also in Samurai, but we have to build a good track record. We are still a young bank so we need to be able to prove that first before we debut in that market,” said a funding official at Korea’s NH Bank.
South Korean issuers sold a record ¥317.7 billion (US$3.4 billion) in Samurai last year, which is the largest amount compared to other Asian countries. Export-Import Bank of Korea, Shinhan Bank and Kookmin Bank were the top three Samurai market players in 2012, according to Dealogic.
Woori Bank was the first and only commercial bank to issue in the Samurai market so far this year through a ¥24.3 billion issue maturing in 2015 and a ¥5.7 billion bond due in 2016 at coupon rates of 0.77% and 0.87% respectively. That is the lowest coupon achieved by a Korean commercial bank in Japan-to-date.
KT Corp was the first corporation to open the Samurai bond market this year on January 23 with a ¥5 billion bond due 2015, ¥18.2 billion issue maturing in 2016 and ¥6.8 billion due 2018. Those issues were priced at 31bp over yen swaps for the 2-year bond, 43-44bp for the 3-year and 53-54bp for the 5-year bond, allowing the company to pay cheaper rates than won borrowings.
Bankers had initially hoped that South Korea’s steelmaker POSCO would add to the momentum in the Samurai market due to its ¥63 billion in bonds due in June and August, but the company’s high leverage may make it difficult for the company to issue additional Samurai debt for refinancing.
“The company has issued too much debt and is on a negative ratings outlook so they might be looking at all other options except bonds,” said a Hong Kong- based debt banker. “They could do a hybrid instead to fund that debt, but that would probably have to be denominated in Korean won.”
Moody’s said POSCO’s failure to cut debt levels in the next six to nine months would raise pressure for it to cut its ‘Baa1’ rating, according to a January 30 report.