Woori takes Korea into Basel III era

On 23 April Woori Bank launched the first Basel III-compliant capital instrument from South Korea, a $1bn 10 year bullet with write-down loss absorption. Neil Day asked Chang Yeon Kim, general manager, treasury department, Woori Bank, about the challenges of bringing such a deal, and Frits-Jan Algera, head of syndicate for Asia ex-Japan, at Crédit Agricole CIB, about the execution.

Through its Tier 2 issue, Woori has been a pioneer in a nascent segment, the Basel III-compliant Tier 2 space, in Asia ex-Japan, and more particularly in Korea. What were the main obstacles that Woori had to overcome before launching this deal, which I understand you had been planning for quite some time? How did you manage the process with the regulator? Did you face any particular challenges?

Chang Yeon Kim, Woori Bank: There were many obstacles we had to overcome, especially because the deal was the very first of its kind out of Korea and moreover, from the Korean banking sector. Especially given that Basel III implementation in Korea had begun only a short while ago. Everything had to be produced from scratch — the relevant communication with the regulators Financial Services Commission (FSC), Financial Supervisory Service (FSS) and Ministry of Strategy & Finance (MOSF), and the documentation process, among others. Even the regulators’ approval processes had to be newly established, as they, too, had to deal with this type of transaction for the first time.

Furthermore, three separate channels of communication had to be managed concurrently. With the FSC, we had to discuss the amendment of the Banking Act, while with the FSS we had to address the financial strength and prudence of the bank in relation to raising capital under Basel III. The MOSF was focused on making sure we chose the right issuance window.

What were the key elements of the structure?

Frits-Jan Algera, Crédit Agricole CIB: The Basel III regimes in Japan and Korea allow for pre-emptive capital injections before a bank reaches the point of non-viability (PONV) and a write-down of subordinated debt is triggered. A Korean bank is deemed to have reached the point of non-viability if it receives a management improvement order, which could result from situations including a bank failure or its Tier 1 capital adequacy ratio breaching 1.5%, or CET1 ratio below 1.2%, or Total Capital ratio below 2%.

At year-end 2013, the Basel III Total Capital ratio of Woori stood at 15.52%, the Tier 1 ratio at 12.68%, and the CET1 at 11.05%, far above the PONV Trigger Event levels.

Woori executed a global roadshow prior to the transaction. How would you describe the experience from this critical marketing exercise? Was it in line with your expectations?

Kim, Woori: In our view the roadshow was highly effective and beneficial. The lion’s share of the investors we met on the road placed firm orders. Moreover, we received a lot of follow-up questions through which we could confirm that the investor interest was quite high.

How did the pricing and order book develop?

Algera, CACIB: After a one week roadshow in Europe and Asia and several investors calls with US accounts in the week of April 14, we announced the transaction on Tuesday, April 22, just after the Easter break, and communicated the broad structural terms of the potential transaction. On the back of positive feedback on the structure and some large indications of interest received on Tuesday, we were comfortable to open books on Wednesday.

We started the bookbuilding process with an initial pricing guidance of Treasuries plus the 237.5bp area during Asian hours. Within 90 minutes the books grew to over $1bn, with high quality accounts and good granularity. The book enjoyed a second round of momentum when Europe opened. Asia books went subject at 1600 Hong Kong time, while the European ones closed at 0930 UK time.

The syndicate decided to accelerate the process and to close books in Asia and Europe before announcing the final guidance. The rationale behind this was to avoid excessive inflation. The order book settled at $4.5bn by the end of the Asian trading day and ahead of the US open. Given the overall reception of the trade and the level of interest out of Europe and Asia, the syndicate tightened final guidance to the 212.5bp over Treasuries area (plus or minus 5bp). The books closed well in excess of $5bn, with over 230 accounts participating. The $1bn RegS/144A transaction was priced at 207.5bp over Treasuries, the tight end of the final guidance, with a 4.75% coupon to yield 4.756%.

What factors influenced the approach to pricing? What are the main reference points you and your syndicate banks looked at to determine the appropriate pricing level?

Kim, Woori: The most difficult part of determining the pricing was the selection of comparables. Thanks to the similar transactions completed by Japanese banks (Mizuho and SMBC), we were able to first pick a starting point.

Algera, CACIB: Indeed. In terms of pricing rationale, we took two approaches. We looked at the trade in relative terms versus peers Mizuho and Sumitomo in Basel III format. Mizuho’s recently priced 4.6% 2024 subordinated notes traded in the context of 170bp over Treasuries, while Sumitomo comparable 4.436% 2024 bonds were indicated just below the 160bp mark. In senior, Mizuho and Sumitomo are trading around 35bp and 45bp inside Woori, respectively. This implied fair value in Basel III subordinated format at around 205bp over Treasuries. But we also looked at applying a Basel III premium to Woori’s legacy Tier 2 bonds. The premium is around 20bp in Japan, while Korea’s Basel III rules are not as investor-friendly as Japan’s. Applied to Woori’s existing 5.875% 2021 legacy Tier 2 bonds, after adjusting for the curve to 2024, we were back in the low 200bp over Treasuries.

Kim, Woori: The other concern was how receptive the investors would be to usage of a single rating of Baa3 from Moody’s. Although this is an investment grade rating, we were concerned that some investors might be reluctant to participate in the deal for lack of a second rating.

Why was a 10 year bullet structure chosen?

Algera, CACIB: Woori’s bond was the first 10 year bullet Tier 2 from an Asian (ex-Japan) issuer. Despite not physically going to the US for a roadshow, Woori still opted for the more US investor-accepted 10 year bullet structure. The marginally lower participation from the US was also explained by the fact that US investors are more familiar with the Japanese banks given that Korean ones haven’t been very active. The Asian participation rate was not a surprise as investors showed a very keen response during the roadshow and bookbuilding process for the Korean credit story. This was also a result of the recent outperformance of Korean credits versus bonds from other Asian jurisdictions.

In the end Asia took 41% of the transaction, while the US made up for 33% and Europe 26%. Fund and asset managers bought 61%, private banks 20%, banks 9%, pensions and insurers 8%, and other investors came in for the rest.

What are the key takeaways from this transaction? And are you happy with the distribution and granularity of the book?

 Kim, Woori: There were a number of key takeways.

In completing this transaction Woori Bank strengthens its capital base, which would help with price negotiation in terms of the privatisation process.

The deal is history in the making as it is the first ever transaction of this kind out of Korea. Effectively, the transaction was also an assessment of the success of Basel III implementation in Korea.

The size, structure, tenor, book size and finally the ultimate pricing all contributed to the success of the inaugural transaction.

How did the deal perform in the aftermarket?

 Algera, CACIB: The transaction was FTT at 1230 EST in New York. At the break, the bonds traded as tight as 203bp on the bid side. The bonds subsequently widened during the first day of Asian trading to re-offer in the Asian hours as the market backdrop worsened on the increased geopolitical tensions in the Ukraine and the heavily anticipated pipeline from Asia for the following week. The bonds closed the week out at 218bp/216bp, however, on very limited flow.

The AT1 market is booming in Europe. Is it an instrument that Woori could consider in the future?

Kim, Woori: If further capital raising becomes necessary AT1 issuance might be considered, but there are no plans at this time.

And what are your impressions about sentiment towards the Korean banking sector in general?

Kim, Woori: The perception of the Korean banking sector seemed quite positive from the investors. They seemed very comfortable with not only our credit story but also with the Korean bank sector. We did feel that Korean bond spreads have been tightening a bit too aggressively in the eyes of the investors. Perhaps that is why our Tier 2 was able to achieve the success it did.