What price Korean bonds?
South Korean bond issuers have garnered a reputation for squeezing investors for every penny possible with aggressively-priced transactions. Investors may be critical of their tactics but the market needs to recognise the savviness of this strategy.
The topic of Korean bond pricing has reared its head once again in the wake of the Export-Import Bank of Korea (Kexim) announcing a non-deal roadshow from October 6 to update investors. The meetings have come about thanks to last month’s decision by Standard & Poor’s to raise Kexim’s ratings by one notch to AA-.
Kexim’s upgrade came hard on the heels of the sovereign’s own uplift also to AA-, marking the first time the country has simultaneously carried this level of rating from all the three agencies. But while Korean borrowers have been cheering, the upgrade has triggered concern about what their new pricing matrix might look like.
Korean trades almost always cause pricing disputes among market participants. It is not uncommon to see investors and bankers away from a deal – and sometimes even those who worked on the trade – bash an issuer for being too aggressive and unrealistic with its pricing target.
This was the case with the Korea Development Bank’s notes in October 2014, which tanked in secondary and led to a standoff between the issuer and dealers about who was to blame for the pricing. And it’s been the same debate with just about every bond from a Korean name since then.
Yet it’s time everybody came to terms with the fact that Korean borrowers will continue to price with the tightest possible terms. And this may be no bad thing for the market.
For starters, most Korean dollar bonds are 144A or SEC registered, unlike the majority of Asian debt which is typically Reg S only. This means that their main focus is not Asia or Europe but US investors.
Of course books still open first in Asia giving the region’s investors a chance to participate but launching with generous initial guidance would only end up inflating the order book, which in turn only serves to create an allocation headache.
Adding to the burden for Korean issuers, particularly the state-owned ones, is the lack of room they have to increase the size of a deal due to pressure from the government to reduce debt. This means the borrower cannot embrace the extra demand.
This is where tight pricing comes in handy as it can deter fast money accounts. This is especially true given that Korean issuers ideally want to have 30%-40% of US participation for a 144A or SEC-registered transaction. That becomes tricky if Asian accounts have already taken books to bloated levels, an approach DCM bankers grudgingly agree with.
All this means Korean names will continue to extract every basis point they can, especially as the upgrade means issuers will be able to shave an additional 10bp off future transactions. If investors don’t like it, they can choose to walk away.
But before the next round of grumbling begins, it’s worthwhile remembering that Korea’s borrowers have proved time and again that the final pricing is spot-on. The majority of the bonds issued this year are trading relatively well in secondary and there has not been one instance where there was fear of a transaction failing.
This means that investors should probably put aside some extra bucks if they want a share of Korean bonds. After all, high-quality products don’t come cheap.