Woori’s AT1 hard bargaining is a bad deal for bonds

A lot was expected of Woori Bank's $500m additional tier one (AT1) trade last week. Not only was the issuer the first non-Chinese bank to print an AT1 in Asia ex-Japan, but it was also showcasing a structure that was different to any seen globally so far.

Instead of having a numeric common equity tier one (CET1) trigger, Woori’s AT1 can only be written off in full when the firm has been designated as an insolvent financial institution by the Financial Services Commission (FSC) of Korea or the Korea Deposit Insurance Corporation (KDIC).

AT1s in other jurisdictions, on the other hand, come with a numeric trigger on top of that condition, with loss absorption through conversion to equity if the issuer's CET1 ratio falls below a pre-determined level.

The unique structure for Woori meant it was unsurprising that investors had a hard time gauging pricing, and the borrower ended up with indications of interest ranging from the low 4% to high 5%. The Korean lender took the middle ground and opened books at 5%.

On paper, that seemed like a perfectly sensible thing to do — but it wasn’t. There can be a big difference between the median and the mean, and while Woori had indeed attracted IOIs in that range, most hovered between mid and high 5%. Woori ignored that inconvenience, however, as it wanted to price inside 5%.

The AT1 struggled to gain traction during bookbuildng and ended up with an order book of just $1bn. And investors made clear what they thought of the final price of 5% when the deal traded in secondary, with the par-issued paper sinking as far as 98.5 on its first day. That's not the type of performance you want to see from a market-opening trade. The 30NC5 bonds were sitting at 99 on June 9.

From a purely treasury perspective, there’s nothing wrong with Woori trying to push the boundaries of pricing. It got the demand it needed to get a deal done. Korean names also have a reputation for driving the hardest bargains in Asia, so investors were going in with their eyes open.

But as the first Korean bank selling an AT1, Woori was expected to do more than just go out and get a deal across the line at the tightest possible pricing. Part of its role — as the issuer approved to be first out of the blocks — was to pave the way for others, and it was well aware that the rest of the Korean banking industry was lining up behind it.

In China, the landmark $6.5bn AT1 from Bank of China was able to be followed in short order by a $5.7bn triple-currency trade from Industrial and Commercial Bank of China (ICBC). But it is fair to say that no Korean lender would want to try and brave the bank capital market anytime soon.

With great power comes great responsibility. Woori's status as one of the biggest banks in Korea, a name that is one of the best followed in Asia, means that it knows it can get away with ruffling a few feathers, safe in the knowledge that it will always have plenty of suitors.

But that same status also means it should in this case have been more responsible and acted with the broader picture in mind. It didn't, and that will make life tougher for others when they come to sell their own AT1s.

Investors bear responsibility for choosing to participate in deals, of course — the concept of "buyer beware" is a familiar one. Just how familiar is something that other Korean lenders will now find out for themselves.