Korea Finance Leads Charge to Dollar Bonds as Yields Tumble

The steepest drop in yields in almost two years is drawing companies in South Korea to sell bonds denominated in dollars.

Korea Finance Corp., the state-owned financier, sold $750 million of 10-year notes yesterday, according to data compiled by Bloomberg. The offering followed deals from Korea Development Bank and Korea National Oil Corp., which issued $1 billion of bonds each in October, bringing the total for the month to $2.24 billion, the most since April, the data show.

Corporate borrowing costs are falling as investors gain confidence that Europe’s debt crisis will be contained, and won’t further slow the global economy. Yields on dollar debt sold by South Korean companies fell 35 basis points, or 0.35 percentage point, in October to 3.74 percent, the biggest monthly drop since November 2009, JPMorgan Chase & Co.’s Korea index shows. The yield was 3.68 percent on Nov. 8.

“Our sale was well-timed,” Yang Seung Weon, head of the global funding team at Korea Development Bank, said in a telephone interview from Seoul Nov. 3. “If we had waited just a few more days, we wouldn’t have been able to pull it off.”

The state-run lender sold its notes on Oct. 27, after European leaders agreed to write down Greek government debt by 50 percent, and before the accord was thrown into jeopardy by a proposed referendum. Greece is now closer to getting outside financing after Prime Minister George Papandreou resigned and the country formed a new unity government, giving South Korean lenders another opportunity to come back into the market.

Hana, Shinhan

Hana Bank and Shinhan Bank hired banks in September to handle their planned dollar bond sales.

Korea Finance’s notes were sold with a coupon of 4.625 percent to yield 265 basis points, or 2.65 percentage points, more than Treasuries of similar maturity, Bloomberg data show. Bank of America Corp., Credit Suisse Group AG, HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Daewoo Securities Co. helped underwrite the deal.

“The market window didn’t really stay open continuously, but it kept shutting on us until last weekend,” Kim Heung Sang, Korea Finance’s head of global funding, said in a telephone interview from Seoul on Nov. 8 before the sale was completed. “We’ve been monitoring the market and decided to pull the trigger once the Greek situation seemed to be reaching an end.”

Korea Development Bank

Korea Development Bank, or KDB, picked Bank of America, Credit Suisse, Daiwa Securities Group Inc., Goldman Sachs Group Inc., KDB Asia Ltd, and Mizuho Financial Group Inc. to help arrange the sale of its 3.875 percent notes due in May 2017.

The notes, which have the fifth-highest investment-grade rating of A1 at Moody’s Investors Service, were priced to yield 280 basis points more than Treasuries. KDB initially proposed paying 300 basis points, before reducing the so-called premium, or spread, after the European bailout was announced, Yang said.

KDB, South Korea’s biggest seller of overseas bonds after Export-Import Bank of Korea, attracted $6 billion in orders from about 350 accounts, Yang said. The bank usually gets interest from about 200 buyers, he said.

Shinhan Bank and Hana Bank, Korea’s third- and fourth-largest lenders by assets, have been waiting for the right opportunity to sell dollar bonds after hiring banks two months ago. Shinhan picked Bank of America, BNP Paribas SA, Deutsche Bank AG, HSBC and Standard Chartered Plc, while Hana picked Bank of America, Barclays Plc, Citigroup Inc., Hana Daetoo Securities Co. and HSBC.

Investors ‘Wary’

“Investors still seem to be wary, because from their standpoint, the economic risk hasn’t been completely resolved,” Hong Yang-Myung, a credit analyst at JPMorgan, said in a telephone interview from Hong Kong on Nov. 1. “Borrowing costs might still remain fairly elevated for corporate issuers, given the cautious sentiment.”

Issuing non-U.S. dollar bonds in currencies such as Japanese yen, Hong Kong dollars, and Thai baht, and then swapping the proceeds into dollars became attractive to Korean borrowers as yields climbed to a 16-month high of 4.24 percent on Oct. 5 as measured by the JPMorgan index.

Company bonds sold in currencies other than the dollar have surged 69 percent to $12.8 billion this year, compared with the same period last year and the highest since at least 1999, according to data compiled by Bloomberg. Dollar sales declined 3 percent to $18.1 billion.

“Local currency markets tend to be less sensitive to the rapidly deteriorating foreign-capital raising backdrop,” Yoon Hee Sung, director of the international finance department at Export-Import Bank of Korea, said in an interview from Seoul on Oct. 7.

Dim Sum Debt

The state-owned lender has issued $4.5 billion of securities this year in 12 currencies, not including the South Korean won, compared with $2.2 billion in dollar debt, Bloomberg data show. The sales include 265 million yuan ($41.8 million) of securities sold to Hong Kong investors in August. The so-called Dim Sum bonds were the first for a Korean bank.

“We need to seize opportunities whenever they present themselves, because we don’t see these current volatile and uncertain market conditions easing” through 2012, Yoon said.

The European Central Bank board member Juergen Stark predicted on Nov. 7 the debt crisis will be controlled within two years and the region’s finance ministers pledged to roll out a bulked-up rescue fund next month.

IMF Growth Forecasts

The International Monetary Fund cut its forecast in September for global economic growth this year to 4 percent from 4.3 percent as the debt concerns deepened. That’s the same month that spreads on dollar bonds of banks widened to 365 basis points from 199 at the start of the third quarter, according to Bank of America Merrill Lynch indexes.

Hana Bank made its debut in the Thai market with an 8 billion baht ($260 million) sale of three-year notes priced to yield 4.68 percent on Sept. 27. Korea National Oil, the government-run oil developer, paid 310 basis points more than similar-maturity U.S. Treasuries to sell five-year securities on Oct. 19.

KDB’s bonds were trading at 279 basis points more than equivalent-maturity Treasuries as of Nov. 4, according to data compiled by Bloomberg.

“Our sale will allow other Korean issuers such as Shinhan Bank and Hana Bank to be able to time their issues for when a window opens,” the bank’s Yang said.

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