"We gave our lead managers a very hard time." Kwon Tae-Shin, deputy director general of the ministry of finance and economy's international finance bureau, smiles as he describes the negotiations behind Korea's debt debut. Issuer and lead managers, Goldman Sachs and Salomon Smith Barney, clashed hard on everything from price to fee structures. All night meetings were common. One went on till 3.30am in the bowels of New York's Four Seasons Hotel just hours before the deal was to be launched.
This was no ordinary capital markets deal. The Republic's April $4 billion debut was make or break for Korea itself. "We had a responsibility to save our country," says Kwon. "If we failed then no Korean banks or companies would be able to go to the financial markets again. We might go into a second crisis." At the same time, MOFE faced enormous political pressure to ensure the deal was tightly priced and performed well after launch. Head of the Goldman team Carlos Cordeiro reflects: "Our challenge was: how tight could you drive the deal without it blowing up in your face?"
Running on empty
The story starts back in December. At this point Korea was running on empty with less than $6 billion in reserves and Seoul knew the country was in crisis. On December 8, then deputy prime minister, Lim Chang Yeul, drafted Byeon Yangho into the MOFE's international finance bureau as a director. Byeon had joined the MOFE in 1978 having come top of the prestigious MOFE entrance exam. A brilliant mind and a US trained economist, he has worked mainly on monetary policy as well as putting in a short stint at the IMF in the early 1990s. Lucid especially in English - he is soft spoken and makes an unlikely hero.
When he transferred to the fifth floor of the MOFE's nondescript yellow-brick headquarters in Gwachun the rating agencies had downgraded the country to junk. An international bond issue by state-backed Korea Development Bank had been pulled and the spread on outstanding 10-year KDB paper had widened to around 1,000bp. Worse still, the presidential election left Korea rudderless until February 25 when the new president would take office.
Deputy prime minister Lim had already decided to switch camps to new president Kim Dae Jung's coalition. But in the meantime he formed a three man Emergency Committee for Economic Stability of which he was a member. This committee was to act as a bridge between the outgoing government and the incoming one. Its other members were Kim Dae Jung's special economic adviser You Jong Keun, and Kim Yog Hwan, deputy boss of the United Liberal Democrats (ULD), which formed the other key part of the new president's coalition.
The head of the ULD, and Kim Yog Hwan's boss, is Posco founder, Park Tae Joon - a man widely regarded as Korea's economic tsar. His son-in-law is Michael Byungju Kim, chief operating officer of Salomon Smith Barney's Asian investment banking business. It was no surprise that Kim was one of those invited to a special crisis meeting on December 18 at the Shilla Hotel. The election results were being flashed up as the meeting went ahead.
"It lasted from 6pm till midnight," recalls Kim. "Ourselves and Goldman were given a mandate that night to advise the government on 'the development and implementation of a financing strategy'." That night, says Kim, both firms did their first of many "all nighters". There were no discussions about advisory fees, he adds. Both firms - at that stage - were working for free.
Goldman's Asian fixed income boss, Cordeiro and well-connected Goldman Sachs International vice-chairman Robert Hormats had been courting Lim and his colleagues in the preceding weeks. Lim's confidence in Goldman was later reflected when he chose Goldman partner Gerald Corrigan as a personal adviser. Lim wanted Corrigan because of his experience of the Latin debt crises of the 1980s when he was chairman of the New York Federal Reserve. He also reckoned Corrigan's relationship with US treasury secretary Robert Rubin - a former Goldman partner - would be useful given the US's predominant role in any international bailout.
The most urgent problem was the roll-over of $24 billion of foreign commercial bank debt owed by the Korean banking sector. The advice of both investment banks was to reschedule this first and then issue new debt in the form of international bonds to replenish foreign reserves and instil confidence.
Salomon and Goldman flew in their credit rating advisory teams and invited S&P, Moody's and Fitch-IBCA to Seoul in the week beginning January 12. The advisors helped the Koreans sort through their data to get as clear a picture of the economy as possible. President-elect Kim agreed to see the agencies to answer their questions about political risk. In tandem, Goldman and Salomon produced a preliminary prospectus.
Playing hardball
There followed a period of frenetic activity (see Euromoney's cover story March 1998). The outcome on January 18 was a plan to exchange the bank debt into government-guaranteed debt of one-, two- and three-year maturities. These tranches would yield 225bp over Libor, 250bp and 275bp respectively. A few months earlier Korea's institutions had been able to borrow at around 50bp over treasuries. These new levels hurt national pride - they wanted 200bp on the one-year tranche - but, in a precursor of what would follow, the Koreans refused to accept market price talk (investors had indicated they wanted up to 400bp on the longer maturities). The hardball tactics worked. About 96% of the 200 key banks agreed to the exchange, which took place on March 12. The immediate problem was solved. The next phase - a global bond - beckoned.
Kwon, Byeon and the rest of the team in the international finance bureau - led by director general Kim Woo Suk - then found themselves victims of their own success. With the debt exchange a success and reserves back to $24 billion, there was a backlash in Korea against launching the bond. Why issue an expensive bond today, said critics, when Korea will soon be investment grade again and a bond can be issued more cheaply?
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