Park Aids Bigger KDB Issuance by Warding Off Sale: Korea Markets

Korea Development Bank is planning to issue more foreign-currency debt than its $7.5 billion target in 2014 after parliament blocked plans to privatize the lender.

The 60-year-old government-run lender is considering selling long-term bonds in late August and increasing offerings beyond the goal set in January, Min Kyung Jin, the head of the international banking division, said in an interview. KDB cut borrowing costs when issuing its first Kangaroo notes in almost 1 1/2 years this month, after the National Assembly passed laws that guaranteed its quasi-sovereign status.

“It’s a good signal for investors as we eliminated uncertainties,” Min, 54, said in a May 20 interview. The bank is considering selling “jumbo-sized” global bonds “whilst Korean paper is popular among investors. Korea has shown resilience amid the fragile recovery of the global economy.”

President Park Geun Hye scrapped her predecessor’s plan to denationalize the country’s biggest policy lender as she seeks to increase government support for troubled enterprises and start-ups in Asia’s fourth-largest economy. Notes of KDB, which raised $6.5 billion selling bonds overseas in the past year, rallied as Fitch Ratings Ltd. said the government has increased regulatory oversight of the bank.

Korea Finance Merger

The A$200 million ($185 million) of November 2019 floating-rate securities that KDB sold this month were priced at 110 basis points over the swap rate, according to data compiled by Bloomberg. That’s 5 basis points less than three-year notes issued in December 2012, the data show.

The government is seeking to merge KDB with state agency Korea Finance Corp. by end of this year after parliament passed the legislation on May 2. Korea Finance separated from KDB in 2009 to take over policy financing as former President Lee Myung Bak tried to curb the fiscal deficit by selling state assets including KDB and Incheon International Airport Corp.

Seoul-based KDB may absorb Korea Finance’s planned debt issuance, Min said. The latter projects about $1.5 billion of offshore bond sales in 2014, according to company data.

KDB sold $1.5 billion of notes in January, split between fixed and floating rates. The yield premium on the 3.75 percent 10-year bonds over U.S. Treasuries tightened 23 basis points to 79.2 today, Bloomberg-compiled data show.

The bank’s plans for longer-dated debt are driven by a flattening bond curve, Min said. The extra yield investors demand to hold 10-year Treasuries over five-year securities contracted 28.4 basis points to 100.3 this year, according to Bloomberg-compiled data.

Policy Shift

“The changes are part of a broader shift in Korean economic policy,” Heakyu Chang, an analyst at Fitch, said in a May 23 phone interview. “The new model mandates majority state ownership and reaffirms government solvency guarantees, in contrast with the previous administration’s plans to fully privatize policy lenders.” Fitch rates KDB a fourth-highest AA- , the same as the government.

The regulator in August said that it would scrap a five-year-old proposal to sell KDB to private investors. The policy bank was founded in 1954 to finance industrial development and reconstruction after the Korea War.

“It’s definitely positive for KDB’s credit quality as government support for the bank has become more certain,” Kim Eun Gie, a credit analyst in Seoul at NH Investment & Securities, said by phone on May 23.

‘Creative’ Economy

KDB’s policy role has left it substantially exposed to some relatively weak borrowers, Park Hyun Hee, an analyst at Moody’s, wrote in an April 7 report. KDB posted losses of 1.45 trillion won ($1.42 billion) last year after it helped bail out companies such as units of STX Group.

Park, the country’s first female president, is aiming to make the nation’s economy more “creative” by boosting the service industry and small- and mid-sized companies to cut back reliance on conglomerates.

The Bank of Korea raised its 2014 growth forecast to 4 percent from 3.8 percent on April 10. The won reached 1,020.97 per dollar on May 9, the strongest since August 2008. South Korea’s 10-year won-denominated government bond yield has declined 22 basis points to 3.38 percent this year.

Average dollar-bond yields for Korean issuers touched a one-year low of 2.66 percent on May 16, JPMorgan Chase & Co. indexes show.

“The reversal of KDB’s privatization is a good development,” said David Marshall, a Singapore-based analyst at CreditSights Inc. “It makes sense for KDB to be merged back into Korea Finance and required to focus on a narrower role of helping Korea’s economic development.”

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