Woori Bank: Perpetual first

Woori Bank launched the first foreign currency perpetual Basel III-compliant AT1 from South Korea on 20 September, a US$500m perpetual non-call five deal. Here, Young Ho Suh, executive (pictured), and Hee Seung Yea, team head, foreign currency team, in Woori Bank’s treasury department, explain the deal’s background and execution.

What was the rationale for this transaction?

Woori Bank: It was to refinance the hybrid securities issued under Basel II which are maturing in May 2017.

What were the determining factors for the currency and tenor?

Woori Bank: Taking into account that the main purpose was to refinance the US dollar-denominated bonds, US dollars was considered a priority. And the investor demand for Korean won-denominated hybrid securities is somewhat weaker in the domestic market, so Woori Bank decided to tap the global capital markets with a US dollar issue, where there is ample investor demand for such securities.

The tenor was selected in line with market demand alongside Woori Bank’s mid/long-term debt maturity profile.

What was the feedback/response from investors during your roadshow?

Woori Bank: From 11-20 July, Woori Bank conducted 26 one-on-one meetings and many group meetings with renowned institutional investors across the globe. Investors showed a lot of interest around various topics, including Woori Bank’s privatisation process, Korea’s implementation of Basel III, capital requirements from regulators, and Woori Bank’s funding strategy.

Some investors asked questions about the restructuring of Korea’s troubled shipping and shipbuilding industries, and how the restructuring process would adversely impact the asset quality of Woori Bank. However, investors were relieved of such woes, as Woori Bank’s key ratios, such as NPL and delinquency rates, have constantly improved, on the back of the bank’s proactive efforts to maintain high asset quality.

Consequently, Woori Bank was able to successfully launch the AT1 bond as numerous investors from the roadshow also participated in the offering.

The market backdrop has not been easy to navigate this year. How did you pick your execution window to ensure a successful outcome?

Woori Bank: It has been a difficult year to find optimal issuance windows, due to heightened market volatility stemming from Deutsche Bank’s capital woes, Brexit, and uncertainties around the Fed’s rate hike. The pricing date was just one day ahead of the FOMC’s rate decision, but Woori Bank decided to proceed considering there would be competing supply and heightened volatility caused by events such as the US election. We have to admit that it was a difficult choice, but consequently it was the right choice for Woori Bank.

Were you satisfied with the pricing outcome and the order book?

Woori Bank: Woori Bank issued the first Basel III-compliant AT1 bond in Korea last year with a coupon of 5.00%, the lowest ever achieved globally for its kind at that time. This year, we were able to further tighten the coupon rate by 50bp, i.e. to 4.50% on the back of a strong reception. And the investor base was also well diversified, with Asia taking 60%, Europe 20%, and the US 20%. In addition, it was the first foreign currency perpetual bond out of Korea.

How do you see the AT1 market evolving for Asian issuers?

Woori Bank: Asian hybrid securities have been deemed relatively safer investment tools versus European comparables, as can be seen in the defensive performance of secondary trading levels of Woori bank’s AT1 bonds in spite of the adverse market sentiment amid Deutsche Bank’s capital concerns. Korean hybrid securities are especially investor-friendly in terms of the structure and PONV, etc, as the bonds do not have any hard CET1 ratio trigger and are not eligible for sequential write-down. We believe that investor demand for Korean hybrid securities will remain robust, supported by the sufficient buffers and high chance of pre-emptive government support in the event of possible default.

Would you like to comment on how you prepare your future issuance plans?

Woori Bank: The funding plan for 2017 hasn’t been decided yet, but given that the significant portion of loan loss reserve will be added back to CET1 upon the recent changes in banking regulations, we are expecting that our CET1 ratio will be enhanced by approximately 1.40%-1.50%. Therefore, we currently foresee no need to raise capital through AT1 or Tier 2 bond issuance.