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Thursday, 19 April 2018

South Korea Capital Markets Deal

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The Export-Import Bank of Korea had to draw on all its experience and execution skills to overcome investors’ geopolitical concerns, but managed to deliver a standout deal with its US$2bn three-tranche issue in October.

2017 proved to be one of the most difficult years for South Korean issuers since the global financial crisis. North Korea’s nuclear and missile tests ratcheted up a fiery war of words between US President Donald Trump and Pyongyang’s Kim Jong Un, unleashing a real fear that conflict might break out on the peninsula. It was a scary picture for bond market stalwart Kexim, which is accustomed to investors’ full support in smoother markets.

Global rating agencies warned the geopolitical threat was negative for the country’s Double A ratings and some European and US investors took a break from investing in Korean credits, pushing spreads wider.

While North Korea and the US were practising their military exercises, and South Korean civilians were being warned to prepare emergency supply kits and learning to live with air-raid sirens, Kexim was considering the best way to meet its funding requirements and attract high-quality investors, knowing that other Korean issuers were waiting on the sidelines for its leadership.

Kexim picked October 24 for the launch, targeting a solid day in the markets and getting ahead of China’s rare sovereign bond the day after. The timing worked well and it priced a US$2bn three-tranche deal, the country’s largest bond since October 2016.

Extensive investor meetings in the US beforehand helped and Kexim also offered a minimal new issue concession to win over investors. The transaction restored US appetite for the country’s issuers, with 41% of the 2022 tranche allocated to US accounts – more than double the proportion on previous South Korean bonds.

Good trading performance the following morning showed that the negative impact from the North Korean crisis was subsiding in international capital markets, even as military tension remained.

Kexim’s benchmark provided some welcome relief for other Korean issuers, paving the way for dollar deals from the banking, corporate and insurance sectors soon afterwards. Korea Housing Finance priced its own US dollar benchmark the following day.

Kexim sold a US$400m three-year fixed-rate tranche at Treasuries plus 90bp, a US$1bn five-year fixed-rate tranche at Treasuries plus 100bp and a US$600m five-year floater at 92.5bp over Libor. Total orders reached US$4.4bn and the book was heard to include some large tickets from global investors, while central banks took a sizable 34% of the three-year.

Bank of America Merrill Lynch, BNP Paribas, Citigroup (B&D), Credit Agricole and MUFG were joint bookrunners, and joint lead managers with Mirae Asset Daewoo. Kexim Asia was co-manager.

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