The credit crisis hit Korea hard. Waning appetite for emerging market assets and the turmoil in the European financial sector sent investors fleeing from the country in the closing months of 2008. Liquidity fears contributed to a slump of more than 20% in the value of its currency, the won.
International investors worried that Korea was facing a dollar funding squeeze – sparking memories of the Asian financial crisis of 1997–98 – and the government was forced to intervene last October. It announced a $100 billion debt guarantee programme, cash injections for the banking system and a $30 billion dollar swap facility with the US Federal Reserve.
Set against that bleak backdrop, the $2 billion, five-year bond sold by the Export-Import Bank of Korea (Kexim) in January was a key moment in Korea’s recovery. Kexim’s issue was the first public debt sale in the international markets from any Korean borrower since the previous August. The deal proved to the world that the country’s financial system could still access dollar funding.
“The most important objective was opening the market for South Korean issuers,” said Kim Jin-kyung, head of funding at Kexim in Seoul at the time. “Doing a decent size deal at a reasonable price will help.”
Korea Development Bank reinforced that message days later with a $2 billion issue of its own. Size was also important. Kexim’s five-year credit default swaps, which were below 200bp before Lehman Brothers collapsed, had touched 708bp at the end of October.
Many predicted that Korean borrowers would have trouble accessing the capital markets in any volume. “It was important to send the message that a large benchmark is possible for Korean issuers,” said Kim at Kexim. “There have been questions whether this is possible or not, so now we can prove there is a market.”
That was also an important signal for the currency markets. Kexim extends dollar funding to Korean companies to facilitate international trade, and the injection of dollar liquidity eased some of the pressure on the Korean won.
The deal helped restore a vital funding channel. After a slow start, 2009 has proved to be a record year for Korean borrowers in the international debt markets, with $22.25 billion raised in dollars, euros and yen in the first nine months of 2009, according to data firm Dealogic, which puts the running total well above the $16.04 billion full-year figure for 2008.
Price change
Kexim’s market-opening deal, however, required a painful shift in its approach to pricing. Kexim had gained a reputation in recent years as one of Asia’s most price-focused issuers. It was a blow for January’s deal to be launched at 677.7bp over US Treasuries, equal to 625bp over mid-swaps.
By comparison it had paid 138bp over mid-swaps for a E750 million, five-year deal in May 2008, and just 22bp over Libor for a $500 million, five-year floater in September 2006.
But many of the institutions that bought Kexim’s deals in the past were wrestling with problems of their own – the European structured investment vehicles that blew up in the credit crisis had been among the biggest buyers of Korean credit – forcing Kexim to offer pricing that would attract new investors.
That put it in the uncomfortable position of having to pay a far higher spread than the Republic of the Philippines, which had launched a 10-year bond the previous week at 599.9bp over Treasuries. Standard & Poor’s rates the Philippines seven notches lower than Kexim at BB-.
But the tactic worked, helping Kexim draw orders from US fund managers, many of which will be long-term investors. Bookrunners Citi, Deutsche Bank, HSBC, Merrill Lynch and Royal Bank of Scotland priced the deal at the tight end of Kexim’s target range and placed 65% of the bonds with fund managers. By distribution, 54% of the deal went to the US and only 16% to Europe.
Kexim has already reaped the benefits of its pragmatic approach. It returned to the dollar debt markets this July with a $1.5 billion, 51⁄2 year deal, paying a much tighter spread of 362.5bp over Treasuries – around 297bp over Libor – in a sign of how investor sentiment had improved since the beginning of the year.