The past 12 months were a uniquely turbulent time for South Korean issuers, and Kookmin Bank adapted to tricky market conditions by identifying a new investor base, opening a funding route for its peers in the process.
Geopolitical risk from North Korea was on international investors’ minds in April and May, making it difficult for Korean issuers to access the offshore bond market without paying a premium.
Kookmin, rated A1/A+/A, had been considering issuing an offshore covered bond, but in May it spotted a window in the Formosa market to sell a US$400m five-year floating-rate bond, targeting investors in Taiwan.
Taiwanese investors had been keen buyers of high-grade foreign credits ever since rules were changed in 2014 to treat Formosa bonds as domestic debt. That freed up Taiwanese investors to invest more of their assets in foreign bonds, as long as they were listed in Taiwan, with capital rules making high-grade bonds especially attractive to insurers.
Sole bookrunner Standard Chartered Bank (Taiwan) identified the opportunity and set out to offer investors a credit they had not seen in this format before. A non-deal roadshow in February allowed investors to study Kookmin’s credit profile and paved the way for a bond offering to follow in May.
They proved to be extremely receptive to Kookmin’s offering, allowing the deal to be enlarged from a base size of US$300m on orders of over US$1.1bn. Pricing was set at three-month dollar Libor plus 95bp, tightening from final guidance of 95bp–98bp.
The deal was the largest US dollar Formosa from a South Korean issuer, as well as the first from a Korean commercial bank.
Demand for Kookmin’s Formosa was not limited to Taiwan’s cash-rich investors, helped by a dual listing in Taiwan and Singapore. Onshore Taiwanese accounts bought 56% and others purchased 44%. Going on investor types, banks took 51%, funds took 48% and private banks took 1%.
The transaction was a win-win, giving Kookmin access to a high-quality pool of investors that tend to buy and hold, while allowing the Taiwanese buyside to diversify their holdings with the addition of Korean bank credit.
The strong response encouraged others to follow, and resulted in the rare example of a commercial bank paving the way for a policy lender. Export-Import Bank of Korea followed with its own trade the next month, and KEB Hana Bank came a few months later.
Kookmin successfully visited the Yankee market in September, but it had demonstrated that the Taiwanese market was a viable venue that could match the global market for size and pricing. The fact that the Formosa market stayed open while some foreign investors were turning cautious ensured that it would be on many issuers’ radar in the future.
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