Kexim cuts funding costs by tapping other Asian currencies

Export-Import Bank of Korea (Kexim) relied on dollar bonds for the bulk of its funding this year, but used local market deals — including a novel Taiwanese bond issue — to lower its funding costs. Matthew Thomas reports.

  • 20 Sep 2010
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Kexim tends to lead by example when raising funds abroad, and this year was no exception. The policy bank is a big borrower in the international dollar bond market. But this year it also issued a variety of domestic Asian currency issues and a handful of synthetic emerging market currency bonds showing that the state-owned lender is willing to search far and wide to diversify its funding sources — and raise cheap money in the process.

The policy bank had a funding target of around $8.1bn for 2010, in line with its usual target of between $8bn and $10bn. It is relying on bond markets to hit the vast majority of this target, raising cash from benchmark global bond issues, local currency debt sales and a spate of privately placed MTNs.

The bulk of the bank’s funding this year has come from dollar denominated bonds, from which it raised $2.74bn by the end of August, according to Dealogic data tracking public issues from the bank. But it raised another $1.36bn from local currency issues, including Hong Kong dollar, Singapore dollar, Thai baht and Malaysian ringgit deals — though not always as quickly as it would like.

"We are trying to sell a lot of local currency bonds, especially in Asia," says Hyung-jong Noh, director general in the international finance department at Kexim. "But we have to wait sometimes to make sure the final funding cost is favourable to us. We often need some time to wait for the swap market to work for us."

Kexim has at times heavily reduced its funding costs by moving into Asia’s local debt markets, saving as much as 30bp after swaps when compared to its international funding levels. Bankers say the issuer would be unlikely to fund in Asia’s domestic markets if it did not save money by doing so, but Kexim funding officials argue that this is not their only aim.

"We have two objectives in overseas funding: the first is lowering the funding cost; the second is diversifying our investor base," says Noh. "It’s not an absolute condition that we need to get a lower funding cost in local deals than we do in dollars, but we usually do."

Formosa innovation

Kexim is widely regarded by Asia’s debt bankers as being an important market opener for Korean borrowers, and it has repeatedly fulfilled this role. The policy bank was the first Korean borrower to sell Malaysian ringgit bonds, in March 2008, and the first to raise money in Thai baht, in June that year.

The latest innovation was a "Formosa bond", a deal sold in Taiwan but denominated in a foreign currency. BNP Paribas and Deutsche Bank have self-led deals in the market over the last four years, but Kexim was the first third-party borrower to ever access the market when it sold a $250m deal in June. That gave Kexim one of its cheapest deals all year, saving the policy bank between 20bp and 30bp, and led to growing interest in the product from other Korean borrowers.

Local debt issues make up a small part of Kexim’s overall funding plan — it raised around $850 this year in Malaysian ringgits, Thai baht and synthetic Brazilian real issues — but they form a key part of its strategy and it tends to return to these markets again and again. But when the economics do not make sense, the borrower will turn elsewhere, and it took that view this year with the Samurai bond market.

Samurai bonds are a regular funding avenue for Korean borrowers and a variety of issuers tapped the market this year. Industrial Bank of Korea and Korea Development Bank were among those, and KDB was disappointed at the response to its ¥27bn deal, sold in June. Investors were not hungry enough for Korean credits, said funding officials and Kexim decided to stay away from the market — raising only ¥2bn, equivalent to around $21.5m.

"The sentiment in the Samurai market is not good," said Noh. "It’s not just the investor base, but the funding cost after the swap. There was no urgent need for us to tap the Japanese market this year, since we had other attractive candidate markets that we had to put much more focus on, such as the Formosa bond market."

Targets attained

The policy bank raised around $5bn of its funding target by the end of August, leaving around $3.1bn left. Noh is confident he will have little trouble hitting the rest of his funding target, and looks likely to stick to more conventional markets for the rest of the year.

"In the first half of this year, we raised around half of our money through private placements," he said. "So we know if we raise $1.25bn in the global bond market later this year, we can raise the same amount from private placements. It will be no problem for us to raise around $3bn for the rest of the year."

  • 20 Sep 2010

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