June 8, 2015 / 2:12 AM / 3 years ago

Woori Bank drives hard bargain in debut AT1 capital deal

HONG KONG, June 8 (IFR) - Woori Bank completed South Korea’s first US dollar offering of Basel III-compliant Additional Tier 1 capital last week at the tightest yield on record in the dollar market. The A1/A-/A- rated lender priced US$500m of 30 non-call five-year notes at 5.0%, tighter than similar securities from Double A rated European banks.

The aggressive pricing underlined the appeal of Korea’s regulatory regime relative to some Western countries, and opened up a new source of regulatory capital for Korea’s financial sector.

However, an order book of just US$1bn was not enough to stop the new notes from plunging in secondary trading as many investors viewed the final price as too tight.

Woori’s AT1 was tighter than the offering from Aa3/AA-/AA- rated Scandinavian bank Svenska Handelsbanken, known as a safe bank credit.

Svenska’s US$1.2bn Reg S perpetual non-call six-year bond, rated Baa3/BBB/BBB, priced at 5.25% in February. Woori’s AT1s are to be rated Ba2/BB (Moody‘s/S&P). Woori benefited from Korea’s favourable regulatory regime, which gives the government more flexibility to bail out banks than in Europe.

Korea does not stipulate a numeric core equity Tier 1 trigger for loss absorption on AT1 securities. By contrast, the principal of Svenska’s high-trigger AT1s will partially or fully write down if the group-level CET1 capital ratio falls below 8%, or if the bank’s level falls below 5.125%. In China, the trigger is also 5.125%.

Korean banks are also expected to receive pre-emptive government support during a stress scenario, which will not constitute a non-viability event in Korea, according to a recent Standard & Poor’s report.

Price discovery

However, the price-discovery process for Korea’s first dollar AT1 was “extremely difficult”, bankers said, because fair value was seen as being in the 4% area to as high as 6%, based on spreads between AT1 and T2 instruments of Chinese and European banks.

Initial recommendations from bankers circled the low to high-4% area, based on a gap of around 72bp between Bank of China’s AT1s and T2s.

All the same, bankers concluded that Woori should opt for a wider range, even though its senior bonds trade inside those of its Chinese peers.

“You can’t necessarily use the Chinese as comps because they have strong onshore bids, and they also trade inside the Europeans,” said a banker on the deal. Investors were mainly interested north of 5%, even though other bankers argued that the structure on the Woori AT1 is much better than the Chinese ones.

“If you look at where BOC is trading, in theory, Woori could have been tighter, but it’s clear that the Chinese bid is unique. It’s almost fully government-owned, and a lot of people bought them as a macro view,” said another banker.

“With Woori, they have a history of a missed calls and people still remember that.” In February 2009, Woori chose not to call a US$400m Lower Tier 2 bond due 2014.

Industrial and Commercial Bank of China’s US$2.94bn 6% AT1s, which also included euros and offshore renminbi, were trading around a 4.7% yield to call, and were around 130bp wider than its T2s.

European bank AT1s, however, trade at least 200bp wide of T2 notes, making Woori’s 130bp spread a hard sell. The aggressive pricing weighed on secondary trading, and the new Woori notes fell to as low as 98.5 on Thursday morning before trading up to 99.125. Domestic dynamics

Woori’s ability to access the offshore markets was crucial, because of weak domestic demand for these equity-like securities following regulatory changes that sapped demand from insurance funds.

On May 27, Woori tried to raise W300bn (US$271m) from a 30-year AT1 with a call after 10 years, but managed to attract a book of just W283bn. In the end, it printed a W240bn AT1 at 208bp over 10-year Korean Government bonds to yield 4.43% through bookrunner Meritz Securities.

“The market was afraid of the size, as they expected a US$500m T1 would follow after the issuance,” said a Seoul-based banker. “Another reason for not being fully covered was that the market was already fed up with T1 issuance. The investor pool is limited to pension funds and retail investors.”

Hana Financial Group had sold W270bn of AT1s in two tranches a week earlier, and BNK Financial Holdings and Shinhan Bank are also planning to issue W200bn each of AT1 paper this week.

“We expect more banks to go onshore, but you really need to come to the US dollar markets because you can’t print over US$300m domestically,” said a banker.

In total, Korean banks have raised more than W1trn through domestic AT1 offerings since JB Financial’s W200bn debut last September. These include W400bn of bonds from Industrial Bank of Korea, sold in March, and W160bn from Woori last December, priced to yield 5.21%.

Of the US dollar deal, 70% went to Asia and 25% to the US, while the rest went to Europe. Asset managers accounted for 83% of the orders, insurers for 5%, banks for 5%, private banks for 5% and others for 2%.

The Basel III-compliant 144A/Reg S bonds will roll over perpetually if the issuer does not redeem them. The principal will be fully written down in case of a non-viability event, which occurs if Woori is designated insolvent pursuant to Korea’s Act on the Structural Improvement of the Financial Industry.

Interest-payment cancellations are fully discretionary and non-cumulative.

Bank of America Merrill Lynch, Barclays, Citigroup, Commerzbank and Nomura were active bookrunners. BNP Paribas, Credit Agricole, Deutsche Bank and JP Morgan were passives. (Reporting By Frances Yoon, editing by Dharsan Singh, Vincent Baby, Steve Garton and Daniel Stanton)

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