Burned by China? Come to Default-Free Korea, No. 1 Arranger Says

  • Citigroup sees about 20% offshore debt sale jump in 2016
  • Korean names are safe but tight, says Nomura credit analyst

Citigroup Inc., the biggest arranger of offshore note sales from South Korea, says global investors unnerved by Chinese bond defaults may boost demand during a bulge of refinancing issuance from Seoul in 2016.

International offerings will grow by about 20 percent next year, given maturing debt and sensitive local investor sentiment, according to June Won, managing director of capital markets origination at Citigroup Global Markets Korea Securities Ltd. in Seoul. Sales plunged 25 percent to a five-year low of $26.6 billion in 2015, as the local market offered cheaper borrowing costs. Citigroup sees demand for Korean bonds buoyed by investment-grade yields that are 53 basis points above developed markets.

“Korean bonds can appeal to investors with their scarcity value in Asian investment-grade bonds and the turmoil in the Chinese bond market pushing investors looking for safer names,” Won said. “Most Korean issuers are high-quality names such as banks or state-owned companies. There’s never been a default on offshore plain vanilla bonds.”

Investors are stepping up scrutiny of Chinese issuers after Kaisa Group Holdings Ltd.’s dollar bond default in April and as Sichuan Shengda Group Ltd. this month became at least the seventh firm to default on domestic notes in 2015 amid a slowing economy. By contrast, Standard & Poor’s raised South Korea’s credit rating to AA- from A+ in September and predicts growth superior to most developed economies in the next three to five years.

Credit-default swaps insuring South Korea’s sovereign debt against non-payment for five years were little changed this year at 55 basis points, while those for China rose 21 basis points to 106. China’s sovereign debt is rated Aa3 by Moody’s Investors Service, the fourth-highest investment grade and the same as South Korea.

Supply of Korean dollar bonds is tightening. Of the $119 billion of investment-grade offerings in the currency in Asia outside of Japan this year, $63 billion came from mainland China, with $16 billion from Korea and $11 billion from Indonesia, Bloomberg-compiled data show. China has been the No. 1 issuer since 2013, overtaking Korea, which was the region’s biggest investment-grade source between 2004 and 2012.

Supply of "Korean credits has been tight and probably will remain tight in 2016," said Annisa Lee, Hong Kong-based credit analyst at Nomura Holdings Inc. "Chinese onshore defaults are picking up. It’s our base case that it won’t trigger a major sell off. But if this is not the case, it is possible that investors can go for low-beta names like those in Korea."

Onshore Support

While Korea is dominated by manufacturers and service companies, it isn’t immune to the global commodity slump. Increasing corporate restructuring and mounting rating downgrades in the steel, shipbuilding and shipping industries prompted the Financial Services Commission to say on Wednesday it will take measures to support the depressed onshore corporate bond market.

The spread for three-year AA- rated domestic won-denominated corporate notes has widened 13 basis points this quarter to 56. It reached 25 basis points in February, the lowest since at least 2010.

That may make the offshore market more attractive, according to Citigroup, which arranged 11 percent of all sales this year. HSBC Holdings Plc accounted for 9.6 percent and Bank of America Merrill Lynch 8.4 percent, data compiled by Bloomberg show. Export-Import Bank of Korea was the biggest offshore issuer this year, with 37 percent of total sales, followed by Hyundai Motor Group with 12 percent and Korea Development Bank with 11 percent.

“Despite already being among the tightest in Asia, we think Korean dollar bond spreads will squeeze even tighter during 2016 amid strong support from onshore Korean investors and muted net supply," said Mark Reade, Hong Kong-based analyst at Mizuho Securities Asia Ltd.

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