Increased knowledge of covered bonds helped Korea Housing Finance Corporation uncover demand from new accounts in the US, which together with strong Asian support let the issuer price a $500m deal tighter than its debut last year, according to a lead syndicate banker.

Seoul

BNP Paribas, Nomura and Standard Chartered yesterday (Monday) priced the $500m December 2016 Reg S/144A KHFC issue at 218bp over US Treasuries. The re-offer level represented a spread of around 171bp over mid-swaps, according to a syndicate official at one of the leads.

He highlighted that yesterday’s transaction came with a lower coupon – 3.5% versus 4.125% – and a lower spread – 218bp versus 235bp – than the issuer’s inaugural deal, a $500m December 2015 issue sold in July 2010.

Another covered bond banker noted that the 218bp over level was considerably tighter than guidance of the 225bp over area and said that the issuer had aggressively targeted the tighter level, but he acknowledged that this was ultimately warranted by the size of the order book. He also noted that the bonds had tightened by around 2bp-3bp this morning.

The leads gathered more than $1.5bn of orders from 121 investors, with the vast majority of orders coming from Asian accounts, although allocations are understood to have skewed participation towards international investors.

Asian investors were allocated 41% – split between Hong Kong 16%, Singapore 15%, Japan 5%, Korea 4%, and China 1% – US accounts 41%, the UK 7%, Australia 7%, Middle East and northern Africa 3%, and Switzerland 1%.

Fund managers dominated allocations, taking 47%, followed by banks with 36%, insurance companies 9%, central bank and official institutions 3%, corporates 3%, and others 2%.

Asia and US contrast with euro woe

A syndicate official at one of the leads said that this second KHFC benchmark opened a new investor base compared with the issuer’s inaugural trade, which was a reflection of growing demand and a well-attended roadshow.

Around 40 accounts that were not involved in the debut participated in yesterday’s transaction, most of them from the US, he told The Covered Bond Report, attributing this to US investors’ increased knowledge of the asset class.

“This was also a factor in the stability of their first deal in the secondary market, which was trading at around 180bp over Treasuries,” he said, “so the launch spread of 218bp was deemed very attractive despite a longer maturity.”

A DCM banker at one of the leads said that some new Asian accounts participated in the transaction, with the UK demand also coming from some names that were new but had been targeted on the roadshow.

He said that the high level of oversubscription on the deal showed that transactions targeted at Asia and the US are immune from euro area concerns.

“The success of the order book shows that the resilience of this market segment is far better than any one of us had anticipated,” he said, adding that KHFC has no exposure to Europe and that a lack of other benchmark covered bond supply was forcing investors to consider alternatives.

KHFC’s deal is also the first Asian investment grade bond since the week of 4 July, and came after Korea South-East Power Company last week pulled a $300m five-and-a-half year Reg S bond.

“This is the kind of deal the market was looking for – well rated (one notch above sovereign), secured, repeat borrower with strong government support,” said a lead syndicate official of KHFC’s deal.

The transaction also came shortly after South Korea’s regulators at the end of June established covered bond guidelines, which they described as aiming “to provide a framework for covered bond issuances, diversifying banks’ financing instruments and encouraging banks to offer more long term and fixed rate mortgage loans instead of short term and floating rate ones”.

However, a banker at one of the leads said that the guidelines did not have any discernible impact on KHFC’s new issue.