Koreas financial sector started 2009 in dire straits. Heavily reliant on international funding and with some of the highest loan-to-deposit ratios in Asia, Koreas banks needed to show the world that they were still able to access the international capital markets.
A government-guaranteed three year bond from Hana Bank in April played its part, but Kookmin was the first of Koreas commercial lenders to sell a non-guaranteed benchmark with a $1bn five year deal that opened up a whole new funding market for Asian borrowers this year.
That was the first time any Asian issuer had sold a covered bond, using a pool of mortgages and in this case credit card receivables as collateral to entice investors and keep its cost of funding down.
Kookmin raised $1bn from a 2014 covered bond in May, paying 500bp over mid-swaps. It rallied sharply on its first day of trading, tightening by almost 75bp. That left the bookrunners Citi and HSBC open to some criticism that they mispriced the deal, but the transaction paved the way for a host of Korean deals that all surged in secondary trading.
But almost as soon as Kookmin opened up what its lead managers called a new "bear market funding tool" the market turned, and the issuer found itself once again able to sell senior unsecured bonds at attractive spreads.
Kookmin followed the covered bond up with a $300m 2012 senior unsecured deal in June, the first time it had sold a big unsecured dollar deal since January 2007. After pricing at 390bp over mid-swaps, the bonds again rallied strongly on their first day of trading this time by over 80bp. It was priced amid a glut of issuance from Korean borrowers in the international debt market, all in senior unsecured format.
Kookmin had already met its funding targets for the year by August after selling over $5.3bn of bonds, split between $1.3bn from dollar bonds and $4bn equivalent in Korean won in the domestic bond market.
"We have ample liquidity already so I dont think we need to do another deal this year," says Hong Lyul Kim, head of funding for Kookmin Bank in Seoul.
A new funding tool?
Kookmins landmark covered bond came at a time when Asian issuers were looking for alternatives to expensive senior unsecured issuance or even more expensive residential mortgage-backed securitisations (RMBS). Korean issuers also needed dollars and Kookmins solution looked set to unleash a wave of similar new issues from other Asian financial institutions.
Bankers had been discussing the Asian covered bond idea for some time, with Taiwan, Japan, Australia and New Zealand all mooted at possible launchpads for covered bonds. But it always looked likely that a Korean issuer would move first. They have the backing of the Korean government and they also needed it a lot more.
Korea National Housing Finance Corp which has picked banks for its own potential covered bond can ringfence its assets easily, thanks to clauses written in its regulation. But other covered bond issuers from Korea are expected to follow the Kookmin formula.
But as the markets began to recover and more and more Korean borrowers started to sell senior unsecured bonds to international investors the need for covered bonds appeared to dissipate. "The covered bond was designed as a bear market tool," says a Hong Kong-based debt banker. "Now things arent so bad anymore, why would you use it? The economics have to make sense."
Other bankers agree. "These things do take time to gestate," says a structured finance banker. "The expectation was that the market would be flooded with covered bonds but they didnt happen. Maybe it would have happened if the [senior unsecured] markets remained closed."
Bankers consider Kookmin to be one of the more likely issuers to revitalise the product, as it has already completed the legal and structuring work necessary to sell a covered bond. But spreads on Korean new issues have been falling steadily this year, meaning any additional structuring will be hard to justify unless there is a definite pricing benefit.
Having found a way through the storm in the first half of 2009, Kookmin is hoping for an easier 2010. "Funding costs can improve, we cant say this is the best time," says Kim. "The secondary market has been getting better. Everybody says the economy has gone through the worst. I think the funding market will be better next year."