Why local currency bond markets matter to Kexim
The tide turns for investors following a decade-long of abundant liquidity and low interest rates
THE tide is turning after a decade-long era of abundant liquidity and low interest rate environment, and investors are thus more cautious and selective. As a result, the Export-Import Bank of Korea (Kexim), one of the most frequent and savviest issuers of G3 bonds out of Asia, is highlighting more than ever the importance of tapping the local currency bond markets.
"This year is very different from the past years in terms of market volatility and investor sentiment," Kexim treasurer Jin-kyun Lee tells The Asset. "We are very keen in looking out for attractive local currency bond markets."
When accessing the local currency markets, the main drivers for Kexim are pricing, certainty and timing. "While we need to diversify our funding sources as one of the largest issuers in the region, we also need to think about pricing compared to US dollars," explains Lee. "Local currency markets often tend to be less certain and rapidly changing, which we need to be cognizant of. In our experience, being nimble and capturing the optimal timing has always been the key to effectively tapping the local currency markets."
Kexim, which is one of South Korea's main policy banks, has already tapped the Formosa bond market at least three times this year, raising an estimated 3.57 billion renminbi (US$538 million), taking advantage of the investors' strong appetite for its credit.
In June, it returned to the Swiss franc bond market and raised another CHF200 million (US$202 million) following a transaction in this market in February for CHF350 million on the back of favourable swap conditions.
But the G3 bond market remains Kexim's main funding avenue, having raised an equivalent of about US$3.47 billion so far this year in tapping the US dollar, yen and euro bond markets.
On July 3, Kexim priced a 750 million euro (US$882.35 million) offering, representing the first euro-denominated issuance from South Korea this year. The Reg S five-year deal has a fixed rate coupon of 0.625% per annum with a credit spread set at 43bp over mid-swap. The deal attracted a final order book of over 1.08 billion euro from 68 accounts, with 72% of the bonds allocated in Europe and 28% in Asia, the Middle East and other markets.
The euro bonds came following its foray in the yen market in what was described as the largest ever issuance by an Asian institution in the Samurai bond market. Kexim on June 21 announced the successful placement of 120 billion yen (US$1.086 billion) in the Samurai bond market, which Lee says is always at the top of the bank's list as a funding avenue.
The dual-tranche offering comprised of 70 billion yen for 1.5 years with an annual coupon rate of 0.16% and 50 billion yen for three years, paying an annual coupon rate of 0.27%.
"The Samurai bond market is an important and long-standing source of funding for us, and, therefore, we try to stay relevant and committed to our investors in Japan," Lee points out. "We conducted numerous non-deal roadshows in Tokyo to provide update on our credit and performance. We also have a natural need for yen due to an increase in our yen assets, which was the main reason we came to this market. At the same time, the swap conditions have improved recently."
Lee explains that in the past few years, the cross-currency swap conditions were not favourable, which led to a decrease in Samurai issuance. "As most of our foreign currency assets are in US dollar, we usually swap most of our non-US dollar funding into dollar," he adds.
The Samurai deal saw a strong investor demand, enabling Kexim to upsize the offering from the original amount of 80 billion yen. "The dramatic improvement in the geopolitical landscape of Korea was an important factor in turning the sentiment of the Japanese investors," says Lee. "The offshore investors also played a big role, placing nearly 30% to 40% of the total order book. Given the recent volatility in the emerging markets, Kexim's strong credit as AA-rated also brought additional investor demand."
In terms of pricing, Lee says Kexim paid a small premium for the three-year bonds over its US dollar secondaries. "Our top priority is to achieve optimal funding cost," he adds. "But we also have to consider diversification of funding sources in order to secure stable financing and diversification sometimes requires a slight premium." For the 1.5-year tranche, Lee says it is not easy to give an accurate pricing comparison given how short the tenor is.
The euro and Samurai bond transactions followed Kexim's issuance in the US dollar bond market in May amounting to US$1.5 billion. What was interesting in that deal was the fact that it was launched in dual tranches, both in floating rate notes (FRNs), which was rather unusual as the common practice among issuers was to price a fixed rate tranche and a FRN tranche.
"Given the extraordinary market conditions prevailing this year, our issuance strategy in May was to meet the strongest and most widespread demand among investors," says Lee. "Clearly, we saw an overwhelmingly strong preference among many investors for FRNs, and such was evidenced in many of the deals that were priced before us throughout the second quarter of 2018. In the end, we believe that our strategy was successful and met the investors' needs, as demonstrated by the strong order book."
Going forward, amid the current highly volatile market environment in the wake of rising interest rates, trade war and emerging markets' weakness, Lee says Kexim must be even more savvy and nimble in selecting which markets to access, at what timing and with what strategy.
"Kexim will continue to engage investors and constantly communicates our story, while diligently looking for changes in market dynamics and swiftly penetrating various markets," he says. "We believe that in times like this, the differentiation in credit quality truly matters, and so it is very important to reiterate the "safe haven" aspect of Kexim and the Korean economy to our investors."
10 Jul 2018