Korea Development Bank broke the lull in the Asia bond market by raising about $2bn from a dual-currency SEC-registered trade that attracted more than $5.45bn in orders at final guidance. Despite weak market conditions, the issuer got away with paying one of the lowest premiums to investors in recent times — and was vindicated in the secondary market.
The Aa2/AA/AA- rated borrower raised $1bn from a three year bond at 60bp over US Treasuries, yielding 4.058%. The notes were launched at the 90bp area. KDB also printed a $450m 10 year tranche at 115bp over US Treasuries, yielding 4.273%, versus guidance in the 140bp area.
A €500 five year bond was priced at 38bp over mid-swaps to yield 2.651%, versus initial guidance of 45bp area.
On Thursday morning in Asia, the dollar tranches tightened 5bp to 7bp in the secondary market.
A three year dollar floating rate note tranche was dropped, as KDB was able to raise its targeted amount without that.
“It was a fantastic outcome,” said a Hong Kong-based syndicate banker on the deal. “KDB got away with the finest of pricings, printed above its minimum targeted amount and also managed to sell a long-dated tranche that we thought was not doable in the current markets.”
The longer tenor tranche marked the first 10 year note from Korea since February, according to a statement from KDB.
The trade was also the first public bond after Hong Kong’s sweeping new bookbuilding rules for ECM and DCM deals came into force on August 5.
The deal’s success was in no way guaranteed from the beginning, but was a result of some tough and astute decisions from KDB, which is considered among the savviest issuers from Korea.
The policy bank announced the mandate on Tuesday, testing appetite for three year fixed and floating dollar tranches, as well as a 10 year tranche. A five year euro-denominated tranche was also part of the offering.
But the 10 year proved a bit of a sticking point. As feedback for this tranche was lacklustre, the bookrunners initially advised KDB to drop it.
There was some precedent to that advice. In February, when KDB last visited the market to raise $1.5bn, it had dumped a 10 year green tranche because of weak appetite.
But this time around, KDB’s treasury team was adamant on printing the tenor. “They insisted on pushing out the tranche. There was no discussion,” said the syndicate banker, who added that KDB even handled the initial guidance levels, which were wider than what the bookrunners had proposed.
“They were headstrong but in the end the result was in their favour.”
BofA Securities, Citi, Crédit Agricole, Credit Suisse, HSBC, ING and KDB Asia were the bookrunners.
SSA positioning
Given its strong credentials and its frequent offshore fundraising, KDB has historically been able to execute intra-day trades, announcing the mandate in the morning and pricing the deal later in the day.
However, the borrower has been increasingly trying to position itself as a sovereign, supranational and agency (SSA) issuer recently, rather than a FIG credit. As a result, it gave investors a bit more time to process the deal, while marketing the trade with tight initial levels that were closer to the final pricing, avoiding a 20bp to 30bp revision often seen with other transactions.
“Given the strong credit rating of KDB, we are confident to set our position as a SSA issuer and we deserve to execute bond transactions like other SSA issuers usually do,” a KDB treasury official told GlobalCapital Asia.
“As a leading policy bank in Korea, we will continue to make our best effort to position as an AA credit SSA issuer going forward,” the official said. He added that despite a busy market, the deal received good demand from high quality accounts such as central banks and SSAs in Europe, the Middle East and Africa.
On Wednesday, a host of issuers, including Germany and French agency Sagess, brought out deals in the SSA market.
For KDB’s deal too, intra-day execution was one of the options. But the bank decided to use an “SSA style” execution approach, giving investors a day and a half to look at the deal.
“The extra time was also important for the euro tranche, as investors needed more colour on the deal as markets got busier,” the syndicate banker said.
Pricing advantage
As is usually the case, bookbuilding for the dollar tranches kicked off first during Asia hours, followed by euro books opening at the London open.
Another Hong Kong-based syndicate banker on the trade said combined books before London open exceeded $3.4bn, with the three year attracting most traction.
In a pre-pricing note, CreditSights analysts Yustina Quek and Lim Ze Hao saw fair value for the three and 10 year fixed tranches at 75bp and 120bp respectively.
At final pricing of 60bp over US Treasuries, the three year offered negligible new issue premium, said the Hong Kong syndicate banker, while the first banker said the premium was zero. In its February trade, KDB had managed to secure a negative 2.5bp new issue premium on the three year tranche, while the five year tranche was priced flat to fair value.
Both the bankers said the 10 year tranche, which landed at 115bp over, offered a 15bp concession.
KDB’s treasury official said the deal was priced as per its expectations. The state-owned bank expected the three year tranche to pay minimum concession owing to feedback from investors, the recent market backdrop, and its experience from its February transaction, the official added.
Interest on the FRN tranche remained subdued from the start. KDB could have raised $300m, but after swapping it into fixed, the FRN would have landed 5bp to 10bp wider than the fixed tranche.
As the order book swelled after investors from EMEA and the US came in, it became apparent that the yield on the FRN couldn’t match the fixed rate notes.
“If we had decided to issue the FRN tranche with higher yield than the fixed rate tranche, it would have been unfair for investors in the fixed tranche,” the KDB official said.
Also, KDB got sticky orders on the euro portion, putting a size of €500m in clear sight, giving it the confidence to easily meet its minimum $1.5bn funding target without the FRN tranche.
“The FRN tranche was a free option anyway, and global investors don’t mind if it is dropped when the pricing on the floater doesn’t come at par with the fixed tranche,” said the first syndicate banker.
At final guidance, the euro tranche had orders of more than €650m.
Sticky investors
Despite growing rate volatility after Federal Reserve chairman Jerome Powell’s hawkish statement at the Jackson Hole Symposium, KDB’s deal attracted strong demand from a variety of investors. Last Friday, Powell said rates will inch higher and “restoring price stability will likely require maintaining a restrictive policy stance for some time”.
At reoffer, the $1bn 2025 bond had demand of more than $2.5bn from 133 accounts. The $450m 10 year notes saw books of more than $1.25bn from 75 accounts. The €500m portion had final orders of more than €620m from 44 investors. Bookrunners put in $10m each in the dollar tranches.
Some 26% of the 2025s went to the US, 46% to EMEA, and 28% to Asia. Of the 2032s, 37% went to US investors, 20% to EMEA and 43% to Asia. The euro bond was sold fully to accounts in EMEA.
By investor type, central banks and SSAs took 43% of the 2025s, bank treasuries 23%, asset and fund managers 21% and insurance, pension funds and corporate treasuries 12%. The remaining 1% was sold to private banks.
For the 10 year, 42% went to asset and fund managers, 25% to insurance and pension funds, 20% to central banks and SSAs, 12% to bank treasuries, and the remaining 1% to private banks and brokers.
On euros, central banks and SSAs were allotted 23%, banks 39%, asset and fund managers 37%, and private banks and others 1%.
Proceeds were for KDB’s general operations.