BRIC News Means More Work for Top Debt Arranger: Korea Markets

Defaults in China and sanctions against Russia are good news for South Korea because they narrow the field of attractive emerging markets, the top arranger of the nation’s international bond sales said.

The spread between South Korean notes and equivalent U.S. Treasuries, which reached a seven-year low of 131 basis points, has room to narrow slightly, said Whang Youn Sung, Seoul-based director of global capital markets at Bank of America Corp.’s local unit. Korean offshore bond sales rose 59 percent this year, as dollar-denominated issuance from China and Hong Kong slipped 19 percent.

“Emerging-market investors buy Korean paper because there are few safe assets to buy other than Korean paper,” said Whang. “Developed market investors buy because Korean paper is cheaper than other securities with similar credit ratings.”

Dollar bonds of Chinese real-estate developers slumped after government officials familiar with the matter said Zhejiang Xingrun Real Estate Co. collapsed with 3.5 billion yuan ($565 million) of debt due. The crisis in Crimea, claimed from Ukraine by Russia after a March 16 referendum, may lead to difficulties for Russian companies amid capital flight and falling business confidence, Fitch Ratings Ltd. analysts wrote in a March 6 report.

The average dollar-denominated bond yield for Korean issuers has reached a record low of 3.43 percent, according to a JPMorgan Chase & Co. index. Yield premiums on Chinese securities in the U.S. currency rose to 384 basis points on March 17, the highest since Aug. 30, the data show.

More Customers

“Many high-grade bond investors in the U.S. that we rarely see in the Korean dollar-bond market participated in our latest sale,” JW Lee, finance team leader at Hyundai Capital Services Inc., which is controlled by Hyundai Motor Co., said in an e-mail interview. “We’ve got a foothold to broaden our investor pool into developed markets.”

Investors in the U.S. bought 65 percent of Hyundai Capital’s $500 million issue of three-year floating-rate notes, according to a person familiar with the matter, who asked not to be identified because the details are private. The bonds sold at 80 basis points more than the three-month London interbank offered rate this month.

“Investors normally prefer Korea, China and Russia among emerging markets,” Whang said. “But because of the turmoil in Ukraine and China, Korean paper is luring more investors with its relatively stable situation. Emerging-market investors might be unhappy because its spread has tightened so much already, but there are few alternatives.”

Russia, China

Asia’s fourth-biggest economy may grow by 4 percent in 2017, South Korean President Park Geun Hye said in a Feb. 25 speech. The central bank is projecting 3.8 percent growth this year, the fastest pace since 2010.

By contrast, Russia’s Deputy Economy Minister Sergei Belyakov said in Moscow on Mar 17 that the economic situation showed “clear signs of a crisis.” The nation will probably enter recession in the second and third quarters of this year because of “uncertainty” over unrest in Crimea and tighter financial conditions, VTB Capital, wrote in a research note this week.

China’s bond sales are slowing after Shanghai Chaori Solar Energy Science & Technology Co. became the first onshore issuer to default and Zhejiang Xingrun ran out of cash to repay debt. Borrowers from China and Hong Kong sold $16.6 billion of dollar bonds this year, less than the $20.4 billion in the first quarter of 2013, data compiled by Bloomberg show.

“China allowing defaults may cause investors concern right now, but it might be positive in the long run,” said Whang. “The worst case is companies that deserve to be in default never default.”

Government Yields

Bank of America Merrill Lynch arranged $1.3 billion in offshore bond sales from Korea this year, 12.2 percent of total sales, according to Bloomberg-compiled data. Citi, JP Morgan, Barclays and BNP Paribas came next.

South Korea’s 10-year won government-bond yield rose 4.7 basis points to 3.52 percent this week on signs local borrowing costs will rise, according to Korea Exchange Inc. prices. Incoming Bank of Korea governor Lee Ju Yeol said in a prepared statement to lawmakers yesterday that the BOK’s current policy rate is at an accommodative level. He replaces Kim Choong Soo on March 31.

The corporate bond market is reflecting confidence in the economy. The yield on three-year won-denominated notes issued by AA-rated South Korean companies has dropped 17 basis points to 3.21 this year, according to Bloomberg-compiled data. The won weakened 2.4 percent this year to 1,074.65 per dollar, after gaining 9.8 percent in the previous two years.

“We need to keep watching the concern over Ukraine and China’s change process.” said Whang. “While investors seem to be getting wary of emerging-market bonds, the demand for Korean paper will remain steady for a while.”

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