Korea turnaround gains ground

03/05/2009 | Steve Garton

Covered bond launch opens door to new funds

Korea’s financial system is showing the first concrete signs of a recovery from its near-devastating crash six months ago, as institutional investors return to the battered market and local banks gear up for fresh funds.
The improved conditions come as Kookmin Bank prepares to launch Asia’s first covered bond issue next week – potentially opening the door to new funding for Korea’s dollar-hungry financial institutions.
The bond issue, of between $500 million and $1 billion, will be the first issue by any Asian bank of covered bonds, which are typically backed by mortgages. The bonds remain on the bank’s balance sheet, making them crucially different to the mortgage-backed bonds that have become toxic assets in the US.
The thawing climate marks a dramatic turnaround from the end of last year, when banks found themselves stumped by soaring funding costs on fears for the country’s economic health.
Stephen Williams, head of global capital markets for Asia at HSBC in Hong Kong, said: “The liquidity situation for Korean borrowers is improving, and investors are showing a greater willingness to look away from extremely vanilla products.
“It won’t be too long before we see banks able to access the markets for unsecured, non-guaranteed funding.”
The deal is evidence that investors are returning to Korea, after the collapse of Lehman Brothers last September destroyed the value of the won and left Korean borrowers frozen out of the international markets.
Joint bookrunners Citi and HSBC arranged meetings with investors in New York and London on Friday, at the end of a global roadshow, and are expected to launch the deal early next week.
Kookmin, led by CEO Kang Chung-won, is in the market for a benchmark dollar deal that will be split between three- and five-year maturities. The bonds will be backed by mortgages, but Kookmin is also adding credit card receivables to the pool of collateral – another new twist on the model used in Europe, where banks regularly issue covered bonds to keep down their costs of funding.
Kookmin is also set to be the first private sector Korean lender to sell dollar bonds without a guarantee from the government, in another sign that appetite is returning. A guarantee was given on a $1 billion three year bond sold by local rival Hana Bank at the beginning of April.
Korean banks get 12% of their funding from the international capital markets, according to Standard & Poor’s, making them more vulnerable than most of their Asian peers to the capital markets freeze.
But the government has taken steps to ease dollar liquidity and restore confidence, including introducing dollar swap facilities with the US Federal Reserve. It also launched a $2 billion sovereign bond in April, designed to provide a benchmark for other Korean companies looking to access capital.
But the cost of borrowing remains much higher than in recent years. Kookmin paid just 23 basis points (bp) over Libor on its last visit to the dollar bond markets, in January 2007, but fund managers are hoping to earn at least 450 bp over treasuries on next week’s issue.

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