Woori goes super tight with first non-Chinese AT1

Woori was not in urgent need of bank capital, but after it merged with Woori Finance Holdings in November its tier one capital ratio dropped from 12.7% to 10.7%.

But the government asked state-owned Woori to shore up AT1 capital pre-emptively as, according to a source at the lender, it hopes this will help speed up the bank’s privatisation, especially as the government’s fourth attempt to sell its controlling stake in Woori failed at the end of 2014.

“When the government is trying to sell shares, issuing new shares doesn’t make sense, so we decided to come straight to the offshore debt market with the first Korean AT1 bond,” said the source. 

Difficult task

As the first deal of its kind, active bookrunners Barclays, Bank of America Merrill Lynch, Citi, Commerzbank and Nomura knew it would be difficult.

“Given that it’s the first out of Korea, it was such a difficult task for us to figure out where fair value lies,” said a senior banker on the deal. “The question was, how much premium should we pay above tier two when the spread difference for European bank capital deals is 200bp-300bp and, for China, low 100bp?”

To discover pricing and educate buyers about Korean AT1s, Woori met investors in Asia, Europe and US last month.  

Woori’s main pitching point was that it was structured in a more investor friendly way than deals from Europe and China. Instead of having a hard common equity tier 1 (CET1) trigger, Woori’s AT1 bond will be written off in full only when it’s designated as an insolvent financial institution by the Financial Services Commission (FSC) of Korea or the Korea Deposit Insurance Corporation (KDIC).

But even after the roadshow, the leads struggled to come up with fair value. So they decided to announce the 30NC5 trade on June 2 without price guidance with the aim of gauging interest before official launch on the following day.

“The pricing levels indicated by investors were all over the place – from low 4% to high 5% – but mostly mid to high 5%," said a second senior DCM banker on the trade said. "Given there was as low as 4% area, I think the issuer was looking at that level. But we thought that for most investors even high 4% was unimaginable."

In the end initial guidance was set at 5% area  — the middle ground between buyers and the issuer. But when bookbuilding finally launched, the IPT disappointed some investors who had been closely watching the trade.

“Having studied the deal, I submitted indications of interest and I was going to place an order as planned had its final pricing looked to be low 5%," said a Hong Kong investor. "But having seen IPT, I bailed out."

He used Bank of China’s $3bn 5% 2024s tier two (Baa3/BBB+), which comes with strong sovereign backing and is better rated and more senior than Woori. He also referenced Santander UK’s £750m 7.375% perpetual non-call seven AT1 (B+/BB+), which priced this week.

Woori’s own track record did not help. In February 2009 the bank failed to call a $400m lower tier two bond, becoming the first Asian issuer to pass on a call option on its subordinated debt.

“I understand that Woori’s AT1 is more investor friendly in terms of structure, but still, it was way too tight and I’m sure there are a lot of investors like me,” said the Hong Kong based investor.

True enough, bookbuilding struggled to gain momentum. Although the order book had reached $1bn at 11:20am Hong Kong time, some orders dropped out and the leads decided to announce final guidance of 5% early, at 4pm, to attract more attention. The book peaked at $1.5bn at one point but eventually settled at $1bn from 73 investors.

The 144A/Reg S $500m 30NC5 priced at par with a coupon of 5%, the lowest ever for an AT1 deal.

The Ba2/BB rated bond was trading at a cash price of 99.1 in the early afternoon of June 4, which had risen to 98.75 by late afternoon. This secondary performance sparked a pricing discussion among bankers.

“They went out with a super tight level, which is fine if you know that’s what the market is looking for," said a banker away from the deal. "But they got a $1bn book in Asia, and ended the day also at $1bn, which is a clear reflection that it was not what the market was looking for."

Even bankers on the deal admitted they should have chosen a different strategy.

“Woori pushed all the way to the very edge of the cliff, trying to squeeze every penny out of the deal,” said the first banker on the trade. “The lowest coupon ever – fine, but I think there were other ways to get to the point. We went too tight from the beginning, bookbuilding was difficult, and priced at IPT. I have to admit it was a bad strategy."

But others defended the execution and pricing. “I thought pricing was fair considering this structure is investor friendly compared to any other one in the world," said a third banker on the deal. "The market obviously doesn’t think that way, but it happens."

He said some of the problems also lay with investors, claiming that Asian investors are so fixated with initial guidance and momentum that they are not paying attention to fundamentals.

“I had investors asking me where to set IPT and how much the tightening could be, which, frankly, is quite ridiculous,” he said. “Had investors bid based on fundamentals and not trying to second-guess all our movements, this deal would have had a very different outcome.”

Asian accounts took 70%, the US 25% and Europe 5%. Asset managers bought 83%, insurance 5%, private banks 5% and others 2%.

The source at Woori said they were happy with the allocation, adding that they were able to persuade key US investors to stay and that the biggest order came from them. But he added that the main target was Asia, as demonstrated in choosing a non call five structure, in line with Asian demand, as opposed to non call 10, which was preferred by US investors.

Some Asian DCM bankers expressed concerns that Woori could jeopardise the pipeline for future Korean Basel III deals.

“For a deal that was supposed to open up the bank capital market for Korea, where we’re expecting a good amount of supply, Woori risked shutting it,” said a banker away from the deal.

It might impact other conventional deals too, bankers said.

“Korean issuers want to be treated as those from developed countries, which is as yet unrealistic,” said the second banker on the deal. “I hope Korean issuers change their strategies and start getting comfortable with paying a premium, as one deal can affect the entire pipeline.”

Korea Hydro & Nuclear Power and Nonghyup Bank are expected to return to the dollar bond market as early as the second week of June.