Last year, Korean Development Bank (KDB), the state policy bank, confirmed its status as one of Asia-Pacific's most proficient borrowers, successfully raising a total of $4 billion.
"Our objective was to act as a benchmark for the market and as a proxy to the sovereign. I think that we achieved this goal with a number of excellent transactions," says WG Kim, head of funding at KDB.
In February, the development bank issued an $850 million five-year global bond attracting an order book of $1.2 billion during a 48-hour marketing period.
The SEC-registered deal priced in the middle of its indicated range, with a spread of 97bp over Treasuries. This pricing was achieved despite the investment-grade market weakening in the US.
Given these challenging market conditions, KDB made sure the pricing process was particularly transparent, breaking from the norm to issue a concrete pricing range.
"Our goal was to achieve the tightest possible pricing, but also remain aware of movements in the secondary market. In all of our large transactions last year we had to find a balance between these two things," says Kim.
Showing a keen understanding of the market, KDB capitulated a little on pricing to ensure a good performance in the secondary market.
As market conditions remained volatile, KDB decided to tap the Samurai market, issuing in June a Y50 billion five-year bond. Kim explains that the Japanese market is normally insulated from the extreme movements of other markets and acts as a safe harbour for top-rated issuers.
When markets stabilized KDB pushed ahead with its borrowing schedule and in July issued a $1 billion five-year bond. This was the first time since 1993 that a Korean institution, aside from the sovereign, has issued a $1 billion single tranche bond.
There is no doubt that the appetite was there to justify it.
The deal attracted orders of $2.3 billion, revealing investors' increasing comfort with the bank's credit status and play as a quasi-sovereign borrower. As such the deal priced at 115bp over Treasuries, at the tighter end of price talk.
The order book was both large and well distributed. In particular it revealed the increasing comfort levels of US investors with the credit, with 43% of the book going to the US, 34% to Asia and 23% to Europe.
Kim says that in the latter part of the year attention once again switched to pricing competitiveness. Showing an astute sense of timing, KDB issued a $550 million five-year global floating rate note (FRN) in October that quickly established itself as a benchmark for the Asian FRN market.
The transaction had scarcity value. It distinguished itself by being one of only two SEC-registered FRNs issued by non-Japan Asian borrowers and the first with a maturity of over two years.
As interest rates rose globally, investors were hungry for FRN assets, and the deal attracted an order book of close to $3 billion. "We noticed that the floating rate formula was very popular in the market at the time, and when we felt the timing was optimal we snatched that opportunity," says Kim.
The deal priced at 42bp over Libor – on an asset swapped basis, it priced 5bp through KDB's 4.75% 2009 bonds.
"The second reason that we were keen to access this market was to broaden our investor base from the traditional fixed-income investor field," says Kim, adding that the majority of FRN investors are banks and financial institutions. By taking advantage of the FRN market and pricing inside its fixed rate benchmark, the deal meant that KDB could now use the floating rate curve as a benchmark for its funding programme in 2005. In February, for example, the bank issued a †500 million FRN.
"The success of the October transaction enabled us to promote this use of this format, and the October deal really acted as a benchmark for the February issue," says Kim.
The †500 million, five-year floater was a triumph, pricing flat to the secondary market spread of the 2009 dollar floater.
The deal also achieved the lowest pricing for a South Korean bond issuer since the Asian financial crisis. "You could really feel a change in investor attitude to the Korean credit," says Kim. "From the latter stages of 2004 you could feel the support of European investors become very strong, and their preference was for longer maturities." In total, 75% of the paper was distributed to European accounts.
Kim adds that part of the reason for this was down to the poor performance of the equity markets and of US and European government bonds. "Investors were looking for higher yield while staying with stable credits. Compared to others, the Korean credit offers an attractive yield as well as sound economic fundamentals," says Kim.
Kim says that if overall funding conditions remain the same, KDB will continue to finance the bulk of its international borrowing in the euro and dollar markets. It will also selectively tap the yen and Australian dollar markets.
In terms of local versus international funding the split is likely to remain similar to that of 2004, with 60% raised locally and the remainder abroad. "Previously the diversity of local products was limited, but with the support of the government, the local market has broadened significantly. This is a vital source of funding. We are also seeing more foreigners participate in the local markets," says Kim.