One banker described Hanvit Bank as an “ambassador for Korea” after the successful raising of $850 million through a subordinated debt deal in February. As it turns out, Hanvit may be the ambassador for the entire region as international investors show new interest in the potential of the Asian markets.
The characteristics of the Hanvit deal demonstrate the risk international investors are willing to take in the Asian markets. Hanvit seriously suffered in the wake of Daewoo’s default, and it was among many Korean companies needing to rebuild capital. The solution for Hanvit came with the decision to issue a subordinated bond of upper and lower tier two debt, an innovative move for the emerging markets sector. The Ba2/BB- rated bank was willing to test the confidence of international investors.
JP Morgan, which had previously worked with Hanvit Bank and had experience in emerging markets, was lead manager for the issuance. Jonathan Brown, global head of emerging markets syndicate in London, concludes that the Korean market is at last emerging from the Asian crisis. From the time Hanvit approached JP Morgan to discuss how to raise capital, it took only three and a half weeks until completion of the deal.
The roadshow with Hanvit began in the Asian markets where orders were quickly placed. Investors in the region were already familiar with the bank. Europe proved to be a more difficult market as investors were sceptical about a non-sovereign issue. The challenge in the US markets was explaining the structure of the issuance. Once US investors saw the bonds as part of an emerging markets portfolio, they were ready to participate. Brown said US investors had been seeking diversification, and Hanvit’s position within an emerging market seemed a viable opportunity.
The deal has caused a shift of attention in the Korean markets to below the sovereign level. “This shows the depth of the markets now that the banks are coming into the market,” says Brown.
The $550 million of upper tier two debt was priced at 99.745 with a coupon of 12.75% to yield 12.818% or 612.5 basis points over treasuries. Due March 2010, the deal will step up to 918.75bp over treasuries in March 2005. The remaining $300 million of capital raised, all the lower tier 2 tranche, was priced at 99.463 with a coupon of 11.75% to yield 11.893% on a spread of 520bp, stepping up to 780bp over treasuries.
Brown says investors’ responses to these figures show their willingness to take more risk. “Investors know how good Korea can get and how tight the spreads can be.”
That the issue has recently proven its ability to perform on the secondary market is another indicator both of its success and regional revitalization. According to Brown, there were between eight and 10 accounts that did not initially buy the deal and have now opted to buy in the secondary market.
The only similar issuance has come from Cho Hung Bank, which raised $100 million in December 1999, a figure considerably smaller than Hanvit Bank. However, despite the recent inactivity, other banks may be looking to follow Hanvit’s lead. Brown says that five or six banks were looking to raise capital at the same time as Hanvit, but because of the size of the Hanvit deal, they have had to wait.
Other major Korean issues within the past year include two issues from Korea Development Bank and one issue by Korea Electric Power Corporation, but Hanvit has been the only major issue from a sub-investment grade bank.
On the political front, plans for a summit between North and South Korea scheduled in June could impact on foreign confidence in the markets. While the result of these meetings could eventually be positive for the region, developments will be slow and uncertain.
