Wednesday, 20 March 2019

South Korea Capital Markets Deal

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Export-Import Bank of Korea added a new dimension to the burgeoning market for socially responsible investment, or SRI, with a US$500m SEC-registered bond that marked Asia’s first “green” issue.

Typically, green bonds, proceeds of which are dedicated to ecologically friendly projects, have been small offerings from politically inclined multilateral development banks, but Kexim’s debut underlined the commercial potential for social investments in Asia.

Priced on February 20, the offering came less than a week after a US$1bn three-year from International Finance Corp, the first benchmark-sized trade in the sector, and at an attractive cost of funding.

“Not only did we manage to create a new asset class in the offshore Korean market, but we also achieved a significant cost saving with the deal. The outperformance of the green bond versus Korean policy bank paper in the secondary market shows the market is willing to place a long-term premium on green versus conventional issuance,” said Hee Sung Yoon, director general of Kexim’s funding division.

Kexim saved around 5bp versus what it would have paid via the conventional route. The leads referenced the Kexim January 2017s, which were trading at a spread of 104bp over the US Treasury curve before the deal was announced, and the Korea Development Bank January 2018s, which were at a spread of 95bp.

At the final level of 95bp over Treasuries, Kexim can claim to have priced through its implied five-year curve. Despite the relatively aggressive pricing, at the close of the week the bond had pulled 3bp tighter, indicating the strength of follow-on demand for the new format.

While secondary spreads have widened for the South Korea complex since the bond was issued, it has consistently traded 1bp–13bp inside Kexim’s conventional curve since it was priced. Proceeds from the five-year bond were dedicated to supporting climate-related initiatives. Kexim supports 19 ongoing green projects across eight countries.

There is a discrete universe of SRI-dedicated funds, many based in Scandinavia. The Scandinavian bid anchored Kexim’s offering, in addition to the SRI funds of Pimco and BlackRock.

Bank of America Merrill Lynch led the deal with SEB Enskilda Bank, which uncovered the Nordic demand and helped structure the trade to comply with international green standards.

These standards are exacting and to meet the requirements of the SRI buy-side, Kexim obtained clearance for the deal from the OECD, the Republic of Korea and Oslo-based Centre for International Climate and Environmental Research. It has also pledged to update investors on how the funds are deployed.

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