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Wednesday, 14 November 2018

South Korea Capital Markets Deal

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The first overseas sovereign issue in China’s onshore bond market was a big step in the internationalisation of the renminbi and a milestone for South Korea.

The Republic of Korea’s three-year Rmb3bn (US$433m) Panda bond, launched in December 2015, underlined the format’s enormous potential as the largest foreign issue in the onshore renminbi market at the time. It also set the standard for other countries.

Panda bond rules had yet to be formalised when Korea came to the interbank market, but that did not stop it from attracting orders of more than Rmb12bn. A wide range of investors participated, from domestic banks to securities houses and asset managers. The introduction of high-quality issuers like the Korean sovereign is also expected to lure more foreign investors to look at Panda bonds in future, as they reallocate funds towards renminbi.

The deal undoubtedly had political – South Korean president Park Geun-Hye and Chinese Prime Minister Li Keqiang had expressed their support for the deal, and the RoK’s Ministry of Strategy and Finance attended roadshows along with the People’s Bank of China. Korea is the biggest exporter to China and one of the largest importers of Chinese products, so the renminbi plays an important role in its trade balance.

The Panda was another step towards the internationalisation of the renminbi, coming shortly after the International Monetary Fund announced two weeks earlier that the currency would be added to the basket underlying Special Drawing Rights.

Irrespective of political considerations, the offering made financial sense for Korea and locked in a low coupon. The deal priced at the lowest yield on any Panda bond since the market reopened, coming at par to yield 3.0%, at the tight end of 3.0%–3.5% guidance. Notably, that was 30bp tighter than the offshore Chinese government three-year bond yield at the time.

It also prompted others to follow. Once Korea had set a benchmark, the Republic of Poland and British Columbia followed, and other sovereigns have since expressed an interest in joining the queue. Export-Import Bank of Korea has also looked at a potential Panda bond, raising the prospect that Korea’s policy banks, and even corporate issuers, could add onshore renminbi to their regular funding currencies, once Chinese rules allow.

Bank of Communications was sole bookrunner and joint lead underwriter with Citibank (China), HSBC (China), Standard Chartered Bank (China) and Goldman Sachs Gao Hua Securities. The bonds were rated AAA by China Chengxin International Credit Rating.

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