Korea Southern Power (KSP) is fighting to keep the launch of its $150m five year debut bond on track after a North Korean missile test on Tuesday caused investor interest to falter. The deal is set to be launched today (Friday) but lower than expected demand has left the joint lead managers ABN Amro and Deutsche Bank struggling to secure enough investor support. Korea First Bank is also trying to maintain support for its $400m 10 year non-call five upper tier two subordinated bond after kicking off a roadshow this week. The reports of the missile firing on Tuesday unsettled Asian equity markets and Korean bond spreads. The Korean Composite Index fell 3.9% on Tuesday, while the 2008 bonds of KSP's sister companies Korea South Eastern Power (KSEP) and Korea Nuclear and Hydro Power (KHNP) slipped about 10bp, although they both recovered some ground to trade at about 145bp over Treasuries yesterday (Thursday). Bankers at ABN Amro and Deutsche Bank said that given such a volatile background, successfully executing the issue would be an achievement. "Against the noise in the market investors are being much more cautious about the bond than they would have been a week ago," said a banker at ABN Amro. "The European book is not as strong as we expected, but it is still reasonable and we have reached the point where the issue can go ahead." The deal is being marketed with pricing guidance of 150bp-160bp over Treasuries. The premium over the peer bonds was more proof for rival bankers that the deal is struggling. "This company is effectively the same risk as the other bonds but it is having to offer a premium," said one rival. "Investors do not want to increase exposure to Korea and they are getting bored with these similar genco deals." Korea First Bank is aiming to follow KSP with an upper tier two sub debt issue for up to $400m next week via Lehman Brothers and UBS Warburg. The bank kicked off a roadshow for the global issue on Wednesday in Hong Kong, moving to Singapore yesterday, London today and then travelling to New York and Boston on Monday and Tuesday next week. The transaction should be priced either on Wednesday or Thursday. The bank has a $200m 2006 tier two deal with an annual call in June, which the new deal will help refinance. However, bankers were understandably cautious about the difficult market conditions. "We have a good degree of confidence that the issue will proceed," said a banker at UBS, "but in this market anything can happen." No official issue price has been announced yet, although rival bankers said they believed a pricing range of 250bp-280bp over has been discussed with investors. This compares to Chohung Bank's upper tier two 2010 call 2005 issue, which was trading at 145bp over. Bankers said the deal is likely to be domestically focused, despite the 144A Reg S documentation. "I cannot see many US investors jumping into a Ba1 rated issue that only has a spread of 260bp or so at a time like this," said one rival banker. "The deal will end up in domestic hands or with Asian accounts." Given the military and geopolitical concerns surrounding North Korea, many rivals were surprised that both transactions are pushing ahead. "I don't understand why Korea First Bank or KSP need to do an issue when everything is so up in the air," said one Hong Kong banker. Korea East-West Power is also intending to debut in the international markets, but has opted to go for a ¥20bn five year Samurai bond instead of a dollar debut. "Doing a Samurai bond makes sense for us because Japanese investors are more familiar with the Korean power sector restructuring and the companies themselves," said Charles Park, head of treasury at Korea East-West Power. "We will get a better reception and can get better pricing than a Eurodollar bond as a result." A yen deal would be a lot cheaper on a coupon basis. The decision to go in yen means that Korea East-West Power will not interfere with the Republic of Korea's plans to launch a $1bn 10 year deal in the coming month. Park said the winning bidders would be announced in about two weeks' time. Other bankers said that Daiwa SMBC could have the inside track, based on its previous relationship with Korea Electric Power Corp. The deal itself will have to wait until April. The documentation process for a new Samurai bond issuer usually takes three or four weeks, and the Japanese financial year ends on March 31, which will stop many investors from investing in new bonds. The Republic of Korea's benchmark issue plans are still dominating the dollar pipeline, but the continuing furore surrounding a possible war in Iraq means that the final launch is likely to be delayed from the original March launch. While the continued concerns over North Korea continue to affect the potential sentiment of a new bond, the government had one positive piece of news when Standard & Poor's confirmed its A- foreign currency rating this week. The agency said the increased security concerns surrounding the peninsula were within the acceptable boundaries of its rating. If the sovereign does delay its issue, this could scupper the plans of other potential issuers. Chohung is already said by banks to have been a casualty, delaying plans to price a tier two sub debt issue via Citigroup/SSB. Kookmin Bank could also end up waiting for the sovereign's bond. The bank has already delayed an $850m-$1bn hybrid tier one bond in favour of launching a W1tr tier one bond domestically. The won deal is a cheaper alternative to a dollar deal, but bankers at lead managers Goldman Sachs, ING, Merrill Lynch and UBS Warburg remain hopeful that a smaller international tier one dollar bond can still be resurrected. Korea Highway has more definite plans. The company is looking to price a $300m 10 year deal through Citigroup/SSB and Deutsche Bank in April. But the deal will hinge on the sovereign, as 10 year Korean bonds are extremely rare. Korea Development Bank's (KDB) $600m 5.5% 2012 transaction is the only senior level bond with a maturity over five years. Other Korean issuers in the pipeline could include Woori Bank, which, like Chohung Bank, has mandated a potential sub debt deal.
February 28, 2003
