In 2004 the Export-Import Bank of Korea (Kexim) fulfilled its ambitions to act as one of the country's pre-eminent quasi-sovereign borrowers. In total, Kexim raised $2.5 billion over the course of the year, proving itself again to be one of the most skilled issuers in the region.
"The year 2004 is very meaningful to Kexim's funding history, not just because of our record volumes of issuance but also because of the development and diversification of the maturities and currencies we used," says Sung-Uk Hong, Kexim's director-general of international finance. "This, together with the new ideas and strategies incorporated in the issuance schedule."
Kexim signalled that the Korean market was open for business by launching a $1 billion two-tranche global bond in February last year. It was important for the deal to go well to pave the way for other Korean issuers to tap the international capital markets. "The deal was the first global since the 1997 Asian crisis and was the first US market offering in 2004 for Kexim," says Hong.
However, market conditions were challenging. In February, concerns had grown over a possible interest rate raise by the US Federal Reserve, which led to an immediate widening of spreads in emerging markets.
"I remember that the Korean spread widened by about 15-20bp. But even under such unfavourable conditions the success of the transaction was vital to Kexim," says Hong.
As a result, he says Kexim decided to split the transaction into two tranches to appeal to different investor demand: a five-year bond and a 10-year. "Our strategy of targeting the US and the 10-year part of the curve appears to have paid off," says Hong. "The flatness of the credit curve explained the will to extend maturity. There was only 5bp between the five- and 10-year maturities."
"Also Kexim's absence from the US market for such a long time clearly resulted in significant pent-up demand, which helped leverage pricing at a time when the market was weak. Our successful pricing judgment was re-affirmed by the deal's immediate secondary market trading pattern," says Hong.
Good timing
In April Kexim reopened the global bond for $350 million, sole lead managed by UBS. "The most important factor was timing, and this dictated the choice of only one lead manager. Usually, we have two to three banks lead our deals, but this time we really wanted swift execution. We didn't want a host of banks with slightly different strategies trying to coordinate syndication with one another. We also wanted to catch the market while it was strong. As for pricing, it came inside KDB's and Kexim's secondary market curve for the first time," says Hong.
Again illustrating a canny feel for timing, Kexim issued a $500 million five-year deal in August. "August is a month when many people go on summer vacation, and there was not much supply in the market. We were keen to print this bond before the upcoming heavy issuance in September in the investment grade pipeline. Also the credit spread was rapidly tightening at that time, so we monitored the market for several weeks and printed immediately within 36 hours from the announcement in order to avoid all market risks," says Hong.
The strategy clearly worked. The deal generated an order book of $3.7 billion, with $1.8 billion coming from the US.
In October last year Kexim issued a †300 million, five-year floater. "We figured that an FRN structure with a five-year maturity represented the sweet spot of the market at the time," says Hong. "An FRN made perfect sense, especially since an increasing number of investors were looking for more defensive instruments in a rising interest rate environment."
Only 30 hours after the deal was announced, the order book reached †1.1billion – four times Kexim's target size. "We closed a day earlier for this deal, printing again inside Kexim's and KDB's US dollar secondary market curve," says Hong.
Breaking the barrier
He is particularly proud of the pricing, pointing out that Kexim is the first Korean issuer to break the credit spread barrier of 40bp over Libor for a five-year maturity since the Asian financial crisis.
The success of this deal could lead to further euro issuance. "We are monitoring the euro market daily. Having served as a pioneer in euro issuance, I am confident there will be many euro issuing opportunities for us in the near future," he says.
Hong says that the dollar will continue to act as the mainstay of its funding policy, despite the euro gaining in popularity. "Our major currency will be US dollar because the loan demands from our clients [exporters] are mainly in dollars. However, we are considering euro issuance as the demand for euros is gradually increasing. If the swap rate is favourable it also makes sense to issue in euros and convert them into dollars."
Overall Hong says that 2004's deals and comprehensive roadshows reveal investors' increasing comfort with Kexim as a credit. "We have continuously developed and successfully maintained strong global investor relations through proactive and frequent investor relations exercises, a non-deal roadshow or a deal-linked roadshow," says Hong. "Repeatedly, we told new investors that Kexim is more pure sovereign in respect of its function and role, compared to other policy banks in Korea. We publicized our status as a pure sovereign bank to new investors in not only the big cities in Europe, Asia and the US, but also in niche market cities such as Dublin, Copenhagen, Helsinki, Munich and Amsterdam. Such efforts finally paid off in 2004."
This greater understanding of the Kexim credit allowed the bank to narrow its spread difference between it and the Republic of Korea. "I believe this was one of the most valuable assets that Kexim achieved during the year," says Hong.