Korea SOEs to stay out of bonds as investigation gets underway

So far this year only five dollar deals worth a total of $3.8bn have been issued by Korean credits. This is just half what the market saw in the same period last year, when the country's borrowers rattled off 10 deals for $7.5bn, according to Dealogic.

One Seoul-based credit analyst put the change in large part down to very attractive onshore interest rates, which keep Korean issuers' eyes focused on their home market. "Their priority is to fund as cheaply as possible rather than diversification,” he said.

Bank of Korea cut interest rates to a record low of 1.75% in March and, according to the analyst, the supply and demand mismatch in the domestic bond market means SOEs get away with paying as little as 9bp over government bonds.

“But what’s more important, which is likely to be a trend for the time being, is that Korean SOEs, especially energy ones, will continue to be missing in action," added the analyst.

There is a good reason for that likely absence of state energy companies. In late March, the Korean government launched an investigation into the "energy diplomacy" conducted during the administration of former president Lee Myung-bak.

The Board of Audit and Inspection is investigating allegations that tens of billions of dollars were wasted on a number of overseas natural resource development projects by state agencies, and Korea Resources Corp (KoRes), Korea Gas Corp (KoGas) and Korea National Oil Corp (KNOC) are at the centre of the probe.

According to the Board, the W31.4tr ($2.86bn) spent on 116 overseas energy projects since 2003 has only generated a return of W4.6tr, or 14.6%.

The investigation is likely to deal a blow to issuance. “Given the nature of their businesses and operations, KoRes, KoGas and KNOC are the ones that have the biggest dollar needs among Korean issuers,” said a Hong Kong based Korea DCM banker. “Since the government and prosecutors are now going after the previous overseas projects that went wrong, and the corruption charges, it only makes sense they scrap, or at least halt, all the overseas investment plans.

"This means they will stay away from the offshore bond market for the time being.”

In 2014 KoGas tapped the dollar bond market three times — raising $200m through a private placement in January, a $500m 10 year in February and a $500m 12 year in June. KNOC raised a total of $1.25bn through a $1bn dual trancher in January and a $250m tap in July. KoRes printed a $340m 2.875% 2019 in April.

The Board of Audit and Inspection officially launched the investigation into the companies on March 26 and dispatched five teams to look into their overseas projects in eight countries, including Australia and Canada. 

News of the investigation is already having a knock-on effect on the agencies' funding plans in the offshore bond market.

KoGas, which in February said it aimed to come to the offshore bond market for as much as $1.8bn this year, has told GlobalCapital Asia that it is revising down that figure considerably.  

“We have traditionally sourced funding for overseas development only offshore in order to avoid FX risks, but now that we are revising the amount lower,” said a source at the government-owned natural gas supplier. “We will issue a lot less than originally planned $1.8bn — but at least $1bn.”

Bankers and market participants said the investigation was merely the latest blow to Korean SOE issuers, which were already under mounting pressure from the government to reduce debt levels.

Since the start of the year, the Korean government has implemented a debt ceiling on 16 major SOEs, including KoRes, KNOC and KoGas, setting a cap for their marketable debt (i.e. bonds and other tradeable paper) at 60% of their total debt.

The probe is not bad news for all Korean borrowers. With the investigation limited to state owned energy companies, other SOEs are set to benefit from the increased rarity of Korean names.

“From a basic supply and demand point of view, the Korean rarity value will benefit other unaffected compatriots — agencies and corporates alike,” said a Hong Kong based syndicate official. “Strong government owned credits like Kexim and Korea Development Bank will have a chance to enjoy tighter spreads in the absence of other Korean SOEs.

“It’s hard to translate the benefit into tangible pricing, but 5bp-10bp sounds about right.”

In the meantime, investors appear to have taken a sanguine approach to the investigation. “I think it’s temporary at best and as long as the government doesn’t takes extreme measures, such as privatisation, which is highly unlikely, these SOEs will continue to benefit from their safe haven status,” said a Hong Kong based fund manager.

“Also, in the long term, the government’s efforts to restructure debt and root out corruption will have a positive effect.”

This sentiment has certainly been echoed in secondary markets, with prices rising since the launch of the investigation. For example, KNOC’s $500m 4% 2024s, issued at 99.45, were trading at a cash price of 108.26, while KoGas’s $500m 3.5% 2026s, reoffered at 99.70, were seen at a cash price of 105.34 on Thursday.