FT Beyondbrics – Korean covered bonds: a false start?

FTBeyondbrics, February 18 2013

Korea Housing Finance Corp will hit the road this week to sell a benchmark-sized international covered bond. It’s not the first such deal in this nascent market, but it’s certainly the most confusing.

Last month Korea’s cabinet approved a covered bond bill after about 18 months of discussion and delay, with implementation expected by Korea’s Financial Services Commission around September this year. KHFC is the only Korean borrower that was already permitted to issue covered bonds under existing statutes (Kookmin Bank has also issued but under a different framework and at prohibitive cost) and last did so with a $500m five-year deal in 2011. It had been widely expected to wait for the new law to come into place before launching a new benchmark bond, against which other covered bonds could then be priced and referenced.

Instead, and to the annoyance of many both in and outside Korea, KHFC is launching before the new law comes into place. “It would be better for the market if they waited, then became the benchmark issuer under the new, standardised framework,” says one debt capital markets banker familiar with Korean issuers. “That’s what would be helpful.” Launching the deal so close to the Chinese New Year holiday also strikes some as puzzling. Citi, Nomura and Standard Chartered are the lead managers on the deal.

While bookrunners will not comment on a deal underway, it is understood that KHFC’s reasoning is to raise capital before a potential flood of issuance when the new law arrives, to get the benefit of advantageous pricing that may not last, and because of an agreement with an individual bank. Whereas KHFC’s previous covered bonds were linked to a pool of mortgages from several banks, this one will be linked to mortgage loans from just one. It may be that the bank, so far unnamed, needs the proceeds quickly to meet capital requirements.

Why does all this matter? Because the covered bond market, once under unifying legislation, has the potential to be both a major source of funds for Korean banks and an interesting new asset class for investors. Westpac has projected deal programmes of up to 10tn won (around $9bn) from Korean banks, particularly Kookmin and Shinhan, once the new law is in place. Other Asia Pacific nations, notably Australia, New Zealand and Japan, are also in the early stages of building covered bond markets. KHFC begins a roadshow in New York today on Monday and will visit Boston, Los Angeles, London, Hong Kong and Singapore before formally launching the deal.