The week leading up to Easter marked something of a watershed for the Asian securitization business, with several deals smashing previous price benchmarks and attracting huge investor interest from inside the region and beyond.
While much of the focus inevitably surrounded Korea First Bank's latest cross-border foray, there were other offerings from the likes of Korea Air Lines, Suntec Real Estate Investment Trust and Samsung Card.
As had been reported last week, Korea First priced its fourth international mortgage-backed issue at 13 basis points over Euribor. The 500 million ($671.1 million) transaction was led jointly by Calyon, The Royal Bank of Scotland and Standard Chartered, and featured a MBIA wrap, thus securing triple-A ratings from Fitch Ratings, Moody's Investor's Service and Standard & Poor's.
With many rival bankers suggesting the deal was hard underwritten at 14 basis points - not confirmed by any of the leads - it was believed the arrangers were targeting an 11 to 12 basis point spread. While the final pricing ended up just outside that, the deal was still eight basis points inside the previous benchmark for Korean MBS, set by Korea First in November 2004, with an 550 million offering via Calyon, RBS and BNP Paribas (see ASR 12/6/04).
Given the tightness of the spread, it was not a total surprise to hear rival bankers suggesting a sizeable amount of the bonds would end up in the lead manager's conduits or balance sheets. Those involved, however, claimed the transaction was more than 2.5 times oversubscribed with over 30 accounts participating.
Korea First was understandably delighted, regardless of the speculation. "We were pleased with our debut euro issuance in November and we are even more excited about the execution we achieved on this second euro deal," commented an official at the bank. "A number of investors who participated in the first deal came back for more on the second and that was very satisfying."
An added bonus will be derived from the inclusion of an amortizing junior note in the structure, which allows for 70% of the junior note to amortize prior to maturity, assuming no triggers are breached.
"It is important to achieve a capital benefit under Basel II and amortizing the junior note, which is retained by us, delivers that," the official added.
Staying in Korea, the country's biggest air carrier, Korea Air Lines, was another issuer to set a new benchmark, this time in the future flow receivables asset class. Korea Air, part of the Hanjin Group, recently completed a 20 billion ($191.1 million) deal backed by cargo revenues on its Korea-Japan routes, with Citigroup Global Markets the arranger.
The bonds, which have a three-year legal final and expected maturity of 1.6 years, priced at 40 basis points over Libor, at the low end of the 38 to 48 basis points indicative range over Libor offered during the pre-marketing phase.
Approximately 20 investors were involved, consisting of a mix of banks, fund managers and insurance companies, according to a source. The source added 50% of the paper was placed in Japan, with the remaining 50% largely spread around the rest of Asia.
As was the case with Korea Air's 27 billion debut via Nomura Securities in September 2003, the company's latest offering benefited from a credit facility provided by quasi-government agency Korea Development Bank - the principal reason why Fitch rated the transaction at the single-A level.
In terms of pricing, Korea Air probably benefited from a recent contraction in straight Korea Development debt spreads, as well as those in the ABS markets. "It was a well distributed transaction, and let's be honest: most deals are going very well at the moment," the source commented. "There is a lot of money to put to use and ABS is in real demand."
Citigroup recently arranged a 9 billion offering by Asiana Airlines, Korea Air's main domestic competitor. The deal, backed by excess cashflows generated on a 10 billion future flow deal issued in December 2003, was placed privately and pricing details were not made available.
Meanwhile, one transaction that left some bankers scratching their heads was a $300 million offering from the struggling Korean credit card company, Samsung Card. Just weeks after the company was saved by a W1.2 trillion ($1.2 billion) bailout from its main shareholders, including Samsung Electronics, Korea's biggest card originator was able to do a sizeable ABS via ING.
The three-year transaction, rated Aa3' by Moody's and AA-' by S&P, priced at 30 basis points over Libor. Although many Asian issuers are benefiting from tighter pricing than ever before, most ABS bankers feel this rule would not apply to an ailing card company, expressing amazement at the spread.
"Card companies could do offshore public deals, but who would buy at Libor plus 30?" asked one banker. "The only way you could do a public deal for a card company would be to get a wrapper prepared to offer a guarantee at an economic level, which is not a given because of the memories of what happened in the market in 2002. An unwrapped deal would be open to real volatility unless somebody underwrites the deal, which is probably what happened here."
Some ABS bankers believe the deal will end up in one of ING's conduits, which has been the main method of execution by the bank in ex-Japan Asia. Given how ING's conduits suffered from heavy losses taken on the National Century Financial Enterprises scandal in late 2002 - which effectively killed its Asian franchise until recently - some bankers feel it would be a mistake for any conduit to invest in a deal by a Korean credit card company.
However, others subscribe to the view that if ING is the sole investor, it could achieve major tax benefits. This would be dependent on the bank investing in the whole deal, and in the process picking up a chunk of impaired receivables on the equity piece.
For that portion, an investor would be able to write off the difference between the face value of the receivables and the current price. So if the receivables are purchased at $0.10 when the face value is $1, $0.90 can be written off on the tax return. In terms of credit quality, high subordination levels make it unlikely for the investor to lose money, and there is significant upside if the impaired assets perform well. Additionally, the write-off does not affect the balance sheet, just taxable income.
It is believed Merrill Lynch used a similar strategy last year, when it arranged and bought a deal by LG Card - Samsung Card's main competitor.
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