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North Korea Risk Shrugged Off by Bullish Bond Investors

Updated on
  • Offshore bond sales by Korean issuers jump to most since 2013
  • Issuers want to lock in rates before Fed rate hikes: Citi

North Korea? No problem. That seems to be the stance of investors in South Korean corporate bonds overseas, whose bullishness toward the nation’s economy helped boost sales to the most in four years.

Offshore bond sales by South Korean issuers have risen 22 percent since June 30 from the same period last year to $8 billion, the most for the period since 2013, Bloomberg-compiled data show. Tensions around the peninsula show no signs of settling down after North Korean leader Kim Jong Un fired two missiles over Japan in the past month, but that hasn’t stopped deals including Korea Development Bank’s $1 billion bonds in September.

Investors in South Korean debt have taken in stride the U.S. and North Korea’s threats to destroy each other, with the average yield premium on Korean dollar notes down 7 basis points from its recent peak on Sept. 8. S&P Global Ratings, which gives an AA grade to South Korea, says the nation’s economy has outperformed other high-income countries as exports rebound. The bullishness is good news for Korean borrowers that want to raise dollar funds before the U.S. Federal Reserve pushes up interest rates further.

“Despite the North Korea noise, there’s still demand for Korean bonds as shown in a series of deals digested recently,” said June Won, managing director of capital markets origination at Citigroup Global Markets Korea Securities Ltd., the top arranger of Korean offshore bonds. “There’s also a move from companies to lock in rates ahead of Fed rate hikes.”

Other issuers this month following the KDB sale include Shinhan Bank, Korea National Oil Corp. and Kookmin Bank, all of which offered dollar-denominated bonds, while Export-Import Bank of Korea sold Singapore currency notes. Borrowers in the pipeline to sell dollar securities include Hanjin International Corp. and Kia Motors Corp., according to people familiar with the matter.

Asian corporate bonds tend to have slightly higher yield premiums than U.S. or Australian notes with similar ratings, and that’s especially the case for Korean debt now because of North Korea concerns, according to Steve Goldman, portfolio manager and head of Kapstream Capital, a unit of Janus Henderson Investors.

“Overall we do get paid to take default risks in Korea names,” Goldman said. “But you’ve got this really outside chance that something really bad happens.”

READ: Goldman’s bullish on Korea debt but investors unsure on time

Average spreads on Korean dollar bonds have risen 26 basis points this year, compared with a 19 basis point-drop in Asia investment-grade notes outside Japan, JPMorgan Chase & Co. indexes show.

U.S. President Donald Trump threatened North Korea with annihilation if it menaces the U.S. or its allies, in a speech to the United Nations General Assembly on Tuesday. North Korean foreign minister Ri Yong Ho responded that his words amount to “the sound of a dog barking.”

Ocean Test?

Trump ordered new sanctions on individuals, companies and banks doing business with North Korea as he sought to further isolate the regime and increase economic pressure for it to curb its weapons programs. North Korea struck back at Trump’s threats to destroy it, with Kim Jong Un warning of the “highest level of hard-line countermeasure in history” and his foreign minister suggesting that could include testing a hydrogen bomb in the Pacific Ocean.

Even as the rhetoric heated up, data out of South Korea showed its economy was doing well. Exports rose at the fastest pace in six years in the first 20 days of September, according to Korea Customs Service data.

South Korea’s economy has shown solid performance with indicators improving despite the North Korea risks, Kim Eng Tan, senior director for sovereign ratings at S&P, said last week.

“Although there is no way of telling how the North Korean situation unfolds, the recent underperformance of Korean dollar bonds means they are starting to look appealing to investors with a longer-term time horizon,” said Mark Reade, fixed-income analyst at Mizuho Securities Asia Ltd. in Hong Kong.

— With assistance by Narae Kim

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