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FEATURE
Koreans
call in
Since 2012, Korean-origin issuance has quietly become one of the mainstays of
the sub-triple-A Kangaroo market – and some of the same borrowers have also
started to make their presence felt in New Zealand. There is a lingering sense of
untapped potential in these issuers, some of which say they increasingly view
the Australian dollar as a strategic funding currency.
B Y H E L E N C R A I G
T
he volatile diplomatic situation on the Korean in 2015. As it did in Australia, KDB opened the market and was
peninsula is a clear near-term headwind for closely followed by Export-Import Bank of Korea (Kexim). By
issuance from South Korea in Australasian March 2017, however, Kexim was the Kauri market’s only repeat
markets. But issuers, intermediaries and investors issuer from Korea and the two policy banks remained the only
say the country has gradually become something Korean callers.
of a low-profile fixture in Australia. In New Zealand, attracting In the wake of a first-quarter 2017 Korean-origin Kangaroo
more domestic investors to future deals is a clear goal. and Kauri deal flurry, market participants say both can continue
Korean names were actually the first to issue deals in a format to deepen and broaden. In the past, the tendency of Korean
recognisably the same as contemporary Kangaroos: Korea Kangaroo deals to appear in clusters has led to some perceptions
Development Bank (KDB), Korea Exchange Bank and Korea of opportunism on the part of borrowers – perceptions that the
Long-Term Credit Bank all issued in 1996, nearly two years most active names are keen to disavow.
before the first triple-A-rated supranational tested the waters for
Australian domestic issuance. However, barring false starts in G RE E N L I G H T
2003 and 2007 it was not until 2012 that regular Kangaroo flow Since 2012, Korean Kangaroo issuance has settled into a
from Korea established itself. predictable pattern. Flow tends to coalesce around two periods
According to KangaNews data, 11 Korean borrowers have each year, one per half, with a short flurry of deals at each point.
issued in the Australian market, printing A$9.2 billion (US$7 There have been between three and seven Korean Kangaroos in
billion) of Kangaroo supply. All but A$1 billion of this issuance each year since 2012, including three in 2017 by the end of Q1.
has come to market since Industrial Bank of Korea reopened the In line with the broad constructive tone to credit markets,
door in January 2012. Korean-origin issuers printed A$1.3 billion of Kangaroo deals
Korea has been the third-largest individual country source of between 2 February and 24 March. In New Zealand, Kexim
Kangaroo flow outside the triple-A sector since then, and Korean printed NZ$400 million (US$280.6 million) of five-year notes on
volume dwarfs that of several whole regions. in the year’s only Korean Kauri to date (see table on p74).
As a natural progression to their Kangaroo endeavours, Like other Kangaroo and Kauri borrowers, Korean-issuer
Korean-origin issuers first entered the New Zealand dollar market funding approaches tend to combine strategic and opportunistic
“The pickup in spread on Korean-origin deals versus ‘traditional’ global SSA
issuers is not a difficult argument to make. And there are few other double-A
rated, high-quality, 100 per cent government-owned Asian names.”
MICHAEL KANG WESTPAC INSTITUTIONAL BANK
7 2 | K A N G A N E W S A P R / M A Y 2 0 1 7DOMESTIC INVESTOR ENGAGEMENT
Domestic real-money buyers of Korean-origin Kangaroo deals say they continue to welcome
these names in general, though the regional political situation is giving pause for thought. Fund
managers in New Zealand are less engaged to date.
Ray Lee, Kapstream Capital We welcome further Korean- Korean issuance. Lee reveals a curve and there is general
(Kapstream)’s Sydney-based origin issuance,” Kirkham says. that Kapstream often finds interest in their primary deals”.
head of credit, reveals that Korean Kangaroos appealing
the firm has adopted a more However, Iain Cox, head of compared with the same Lee says Korean issuers are
cautious outlook on Korea of Australasian fixed income issuers’ offshore curves, with notable for the regularity
late as the threat of conflict and cash at ANZ Wealth in the premia typically paid by with which they issue in
with North Korea has raised Auckland, says his firm has not Koreans for perceived limited Australia relative to borrowers
its head once again. “We been involved in Korean-origin liquidity adding to the appeal. from other jurisdictions. He
have been active buyers of Kauri supply to date – based tells KangaNews: “Korean
Korean Kangaroos in the primarily on a credit view. However, in New Zealand, Cox issuers are the most frequent
past but with the current sees a risk-return imbalance. Kangaroo issuers out of Asia,
geopolitical backdrop we are He explains: “Using Korea He tells KangaNews triple-A particularly in the corporate
on hold when it comes to Development Bank [KDB] rated supranational, sovereign space. If these issuers
adding exposure,” he reveals. as an example, it is 100 per and agency Kauri bonds often only access the market
cent owned by the Korean carry a pickup of 100 basis opportunistically it doesn’t
Anthony Kirkham, head of government but even points or more over local matter: ultimately our decision
investment management and though the government is sovereign debt – despite being to participate comes down
Australia and New Zealand responsible for KDB’s solvency higher-rated. The triple-A to relative value – assuming
operations at Western Asset it doesn’t provide any form paper is thus a sufficient proxy the geopolitical situation
Management (Western Asset) of guarantee. We tend to look for New Zealand government remains satisfactory.”
in Melbourne, tells KangaNews for explicit or strong implicit bonds and leaves no need to
that the early 2017 flurry of guarantees, and while we go down to the double-A level New Zealand-based deal
Korean Kangaroo issuance are able to get comfortable of Korean agency issuance. arrangers say they are
came on the back of pricing with how specific guarantee confident domestic investors
conditions that worked for and resolution structures Success clearly breeds will over time begin to
investors as well as issuers. work for issuers in different success when it comes to support Korean-origin deals,
Western Asset remains jurisdictions – Germany, for establishing a consistent especially as further supply
constructive on Korean instance – in our view the market presence, and comes to market. But Cox
names in general terms. Korean guarantee structure Australian investors say they says the barrier to investing is
is just not robust enough.” have grown comfortable with greater than pure volume or
“We look across the breadth Korean issuers’ Kangaroo momentum. “We always look
of Korean Kangaroo issuance Risk-return dynamics strategies. In fact, Kirkham at quality, liquidity, diversity
regardless of sector and A key point of difference says Western Asset is largely and yield – in this order,” he
we are open to the broad between Australian and indifferent to opportunistic or says. “Credit is the first hurdle
categories of Korean credit, New Zealand investors may strategic execution strategies – and if we can’t get past this
from high grade to corporate. be perception of value in “provided issuers are creating the rest don’t matter.”
elements. Fundamentally, however, deal execution largely The same challenges exist in New Zealand. The starting
depends on issuers being able to achieve funding at levels close position for pricing in New Zealand dollars is in line with US
to US dollar cost. Tom Irving, managing director and head of and Australian dollars. Mike Faville, head of debt capital markets
Asia syndicate at TD Securities in Singapore, comments: “The at BNZ in Auckland, says: “If it’s wider than these levels issuers
Kangaroo market has always been demand-driven. If demand is won’t come and if it’s tighter investors won’t buy the deals.”
not there at a price an issuer is prepared to pay, the transaction will As with other Kangaroo issuers, investor diversity is also high
not happen.” on the wish-list for Korean names. Australian investors seem to
“Whether the Kauri market can expand to non-repo-eligible
names is difficult to say with any real conviction. I remain
positive a market exists but getting the deals up to launch is a bit
more challenging.”
MIKE FAVILLE BNZ
7 3FEATURE
be largely comfortable with Korean names from a credit and a
ISSUER INSIGHTS: relative-value standpoint, although the Asian bid is still significant
KDB’s near-term needs in these deals. Domestic engagement is a step further back in
New Zealand (see box on p73).
reduce Australasian
appetite ST RAT EGY C H A N G E
Korean issuers themselves say Australasian currencies have
Korea Development Bank (KDB) has been become a greater focus of their funding plans. These borrowers
absent from the Kangaroo and Kauri markets tend to have US dollars as their core funding option – some are
in 2017. Limited funding need is keeping natural US dollar funders and do not swap to Korean won at all
the issuer away from noncore options – and this is likely to remain the case. But where in the past their
most favoured additional currencies were Swiss francs, euros and
although it insists Australasian currencies
yen, over time market access and relative economics have caused
continue to play an important role.
some larger issuers to reassess their reliance on these currencies
in favour of Australian, and in some instances New Zealand,
KOREA DEVELOPMENT BANK KANGAROO AND KAURI dollars.
ISSUANCE HISTORY
One example is Kexim, the most active Korean issuer in global
PRICING VOLUME MARKET MATURITY SPREAD (BP/
DATE ($M) DATE SWAP, BBSW markets and in Australasia (see table on p76). It says Australian
OR BKBM)
dollars has now become its largest currency exposure outside US
1 Aug 96 150 Kangaroo 15 Jul 99 ND
19 Nov 03 150 Kangaroo 24 Nov 06 53
dollars. Its use of New Zealand dollars is also expanding.
30 Nov 12 400 Kangaroo 7 Dec 15 115
Hee-Sung Yoon, treasurer at Kexim in Seoul, tells KangaNews
16 May 14 200 Kangaroo 22 Nov 19 110 Australian dollars accounted for 7.8 per cent and New Zealand
16 May 14 200 Kangaroo 22 Nov 19 110 dollars 2.2 per cent of the issuer’s total outstanding long-term
20 Nov 15 300 Kangaroo 27 Nov 18 103 foreign-currency issuance as of February 2017. Five years earlier
7 Apr 16 200 Kauri 18 Apr 19 105 the Australasian currencies accounted for just 1.3 per cent and 0.5
SOURCE: KANGANEWS 17 APRIL 2017
per cent respectively.
The fact that the Australian market has become a favourite
KDB was the Kangaroo Regarding Kauris in particular, among Korean issuers is no surprise to intermediaries. Michael
market’s first-ever issuer, the same spokesperson
when it printed a A$150 says: “We were the first Kang, Hong Kong-based director, Asia DCM and syndicate at
million (US$113.8 million), Korean issuer in the Kauri Westpac Institutional Bank (Westpac), adds that Korean issuers
three-year deal in 1996. market and we are constantly are becoming increasingly inquisitive about the Kauri market.
Twenty years later it also monitoring this market for “Issuing in New Zealand dollars is a natural progression for
became the Kauri market’s issuance opportunities.
inaugural Korean issuer, Since KDB’s natural needs
high-grade borrowers that have established a benchmark curve
placing NZ$200 million for New Zealand dollars are in Australia,” he says. “Issuers are initially fascinated that such
(US$140.3 million) of rare we have to swap the a market exists. We see growing investor interest in the Kauri
three-year notes in April proceeds into US dollars. As market’s dynamics, especially following breakthrough transactions
2016. KDB has had a steady a result, the after-swap level
from Kexim and KDB.”
stream of Kangaroo and has to be in line with our US
Kauri issuance in the interim dollar funding target level.”
(see table in this box).
Even so, the KDB KOREAN-ORIGIN KANGAROO AND KAURI DEALS IN 2017
Despite its historic spokesperson says Australian PRICING ISSUER MARKET VOLUME MATURITY SPREAD (BP/
engagement with Australian and New Zealand dollars DATE ($M) DATE SWAP OR
BBSW)
and New Zealand dollar continue to play into the
7 Feb 17 Export- Kangaroo 400 14 Feb 22 117
issuance and the fact that it global funding mix. Import Bank
has been monitoring both of Korea
markets in 2017, KDB does He comments: “We are 7 Feb 17 Export- Kangaroo 100 7 Sep 27 125
not have immediate funding always keen to expand and Import Bank
plans beyond US dollars. diversify our sources of of Korea
funding. Australian and New 23 Feb Export- Kauri 400 9 Mar 22 113
A KDB spokesperson Zealand dollars are both very 17 Import Bank
explains: “Considering our important markets to us and, of Korea
US dollar bond curve, the as we plan to further expand 10 Mar Shinhan Kangaroo 400 17 Mar 21 110
five-year space in Australian our overseas businesses, 17 Bank
dollars seems attractive. we believe our funding 24 Mar Hyundai Kangaroo 400 30 Mar 22 130
However, we do not have need in both markets will 17 Capital
immediate funding plans.” increase going forward.” Services
SOURCE: KANGANEWS 17 APRIL 2017
7 4 | K A N G A N E W S A P R / M A Y 2 0 1 7AU STRALIAN EVO LU T I O N
The reason for the Australian dollar’s rise in Korean borrowers’ ISSUER INSIGHTS:
strategic thinking is the evolution of demand for these names.
Intermediaries say the initial – largely offshore – investor base is
Hyundai the lone
gradually being supplemented by local demand as investors edge
further out the credit curve in the hunt for yield. Specifically, a
Korean corporate
Although it is Korea’s only true-corporate
growing number of Australian investors are looking on double-A
Kangaroo issuer, Hyundai Capital Services
rated Korean agency borrowers as a legitimate yield enhancer to
(Hyundai) is a repeat visitor to Australia.
the core supranational, sovereign and agency (SSA) sector.
In 2017’s Korean Kangaroos, intermediaries say the typical
HYUNDAI CAPITAL SERVICES KANGAROO
buyer is most likely to be a conservative domestic real-money ISSUANCE HISTORY
account that typically focuses on high-quality, developed-market PRICING DATE VOLUME MATURITY SPREAD (BP/
credit. (A$M) DATE SWAP, BBSW)
Kang explains: “The pickup in spread on Korean-origin deals 9 May 13 250 16 May 17 150
27 May 16 350 3 Jun 21 160
versus ‘traditional’ global SSA issuers is not a difficult argument to
24 Mar 17 400 30 Mar 22 130
make. And there are few other double-A rated, high-quality, 100 SOURCE: KANGANEWS 17 APRIL 2017
per cent government-owned Asian names.”
Paul White, co-head of capital markets at ANZ in Sydney, Hyundai issued its third the state-sponsored-agency
suggests the overriding demand driver is domestic investors’ quest Kangaroo in March this year sector. The bulk of Korean-
(see table in this box). In the origin Kangaroo issuance has
for liquid instruments. “There is strong demand for liquidity,” wake of the transaction, a come from policy banks and
he tells KangaNews. “Kexim is a good example of an issuer that Seoul-based Hyundai official government-owned utilities.
meets domestic investors’ needs. It issues reasonably frequently reveals that the firm’s A$400
and in quite large volume. This of itself attracts domestic and million (US$303.4 million) Hyundai raises around 70
fixed- and floating-rate issue per cent of its debt from the
offshore demand.” priced at slightly inside its US dollar market but says it
Some market sources are even confident that Australia has existing A$350 million June is open to various options to
capacity to absorb up to A$8 billion of Korean-origin supply. 2021 bond and in line with maintain a diverse funding
The challenge may in fact be on the supply side. While it does not its US dollar-denominated mix. This means a strategic
secondary curve. “We were approach, which applies in
appear to be impeding individual transactions, there may be room
able to achieve this pricing Australia and elsewhere.
for more issuance diversity. “The composition of deal books with strong support from “When we enter a new
may be changing as some investors get full on specific Korean on- and offshore demand,” market we aim to become
names,” Irving comments. “But this has not had a negative effect the representative says. a regular issuer,” the official
on demand because of the broader array of investors looking at adds. “The Kangaroo market
This is supported by official is one of those where we
Korean credit.” distribution data. Final books apply this standard.”
It is also relatively clear that unless something causes on Hyundai’s five-year deal
individual Korean issuers to turn away from US dollar funding were more than A$500 Hyundai characterises the
they are unlikely to have a lot of additional headroom to issue million and 52 per cent of the Kangaroo market as having
fixed-rate tranche was placed “its own colour and unique
Australian and New Zealand dollars. The opportunity may be
with domestic accounts. Of investor base” but says
to build on the now-established support for Korean names to the floating-rate note, 77 per buyers do not struggle with
introduce credits from elsewhere in Asia to Australia. cent was sold into Asia. the nature of the issuer. The
Kang points out that Chinese issuers provided almost 60 per official adds: “The Australian
cent, or US$130 billion equivalent, of 2016’s offshore issuance Hyundai remains the only true investors we have met had
corporate issuer to come to an in-depth understanding
in the Asia ex-Japan region, from less than 5 per cent – or US$2 Australia from Korea and one of the auto captive finance
billion – in 2009. “The universe of potential Chinese Kangaroo of just two – the other being sector and a good knowledge
issuers is diverse, and when one moves others might as well Shinhan Bank – from outside of our credit as well.”
follow,” he suggests.
N EW Z EALAND M EAS U R ED Both Korean Kauri issuers to date have been repo-eligible
Views on Kauri growth are clearly more measured, with demand in New Zealand. BNZ’s Faville argues that while repo eligibility
yet to be firmly established as a consistent phenomenon. “The is not a necessary condition for issuer success it helps generate
Kauri market will continue to be well supported by the likes of cornerstone interest in a deal. “There are other Korean names
Kexim and KDB although whether it can deepen much beyond that would qualify for repo eligibility and there’s nothing to stop
this is difficult to say,” Irving argues. “There is certainly scope, more of these coming to New Zealand,” he insists. “Whether
but it requires a fundamentally strong New Zealand market. The the Kauri market can expand to non-repo-eligible names is
Kauri market remains harder to break into than the Kangaroo.” more difficult to say with any real conviction. I remain positive
7 5FEATURE
ISSUER INSIGHTS:
Kexim takes a strategic approach
Export-Import Bank of Korea (Kexim) is the most active Korean issuer US dollar transactions, Yoon
explains that this is not the
in global markets. It places a particular focus on Australian dollars in its only driver.“We went ahead
funding mix and has a growing awareness of the benefits of accessing with the Kangaroo deal even
the New Zealand dollar investor base. A strategic approach to both though the expected after-
swap level was wider than our
markets is key.
US dollar secondary curve,” he
Kexim is Australia’s most in the New Zealand market currencies are more expensive says. “Diversification of funding
prolific Korean-origin Kangaroo (see table in this box). than US dollars, favourable sources in currencies and
issuer, with close to A$3 billion economics helped bring the formats is a high priority and
(US$2.3 billion) issued since Kexim has issued in both the issuer to Australia and New continuous access to stable,
its inaugural deal in 2012. It Kangaroo and Kauri markets Zealand in close succession. non-US dollar markets such as
was also the second Korean in 2017. Hee-Sung Yoon, Kangaroo and Kauri is valuable
borrower to enter the Kauri treasurer at Kexim in Seoul, While US dollar funding levels for us in many respects.”
market and is the only to tells KangaNews that while are one of the factors Kexim
have two lines outstanding public bond issuances in all considers when issuing non- The primary driver in tapping
into the Kauri market was the
ability to access new high-
THE EXPORT-IMPORT BANK OF KOREA KANGAROO AND KAURI ISSUANCE HISTORY quality investors. “We believe
PRICING DATE VOLUME ($M) MARKET MATURITY DATE SPREAD (BP/SWAP, that being a frequent issuer in
BBSW OR BKBM)
less deep markets is important.
17 Jul 12 500 Kangaroo 27 Jul 15 190
We are thus committed to
9 Apr 14 500 Kangaroo 17 Apr 19 108
regularly issuing in the Kauri as
14 Nov 14 500 Kangaroo 21 May 20 115
well as the Kangaroo market.”
12 Aug 15 650 Kangaroo 19 Feb 21 120
14 Jul 16 350 Kauri 28 Jul 21 125
Yoon adds: “This said, the New
19 Jul 16 50 Kauri 28 Jul 21 125 Zealand dollar basis swap
30 Nov 16 200 Kangaroo 7 Jun 27 130 happens to have assisted
8 Dec 16 50 Kangaroo 7 Jun 27 127 the competitiveness of
7 Feb 17 400 Kangaroo 14 Feb 22 117 the market to be on par or
7 Feb 17 100 Kangaroo 7 Sep 27 125 slightly more cost-effective
23 Feb 17 400 Kauri 9 Mar 22 113 than the Australian dollar
SOURCE: KANGANEWS 17 APRIL 2017 market for the time being.”
a market exists but getting the deals up to launch is a bit more will see deals taking place and issuers demonstrating that they
challenging.” are committed to the market. Local fund managers were never
The imminent challenge is demand. A very small proportion expected to be a key component of the first transactions.
of Kauri deals has been allocated to domestic fund managers The development set in the Australian market should help.
– around 10 per cent of the three Korean-origin Kauri deals to Josh Sife, director, frequent coverage and syndicate, Asia at
date. Getting New Zealand fund managers involved in Kauri National Australia Bank in Hong Kong, comments: “We have
deals is where the most work needs to be done. now had several years of consistent Korean Kangaroo supply
Faville says many local fund managers’ circumspect with bonds notching up good secondary-market performance.
approach to investing in global credit, even if they make an Realistically, issuers and syndicates get comfort around execution
exception for SSAs, means the challenges are significant but not certainty from the combination of domestic and Asian support
insurmountable. He expects that over time – and much like the for these names – and it is this combination that has facilitated
development of the Korean Kangaroo market – fund managers such robust outcomes.” •
“The composition of deal books may be changing as some
investors get full on specific Korean names. But this has not had
a negative knock-on effect on demand because of the broader
array of investors looking at Korean credit.”
TOM IRVING TD SECURITIES
7 6 | K A N G A N E W S A P R / M A Y 2 0 1 7Now live...
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