KEB Hana Bank sold its first covered bond on Tuesday, a €500m five year social bond that attracted the most orders of four euro benchmarks that day. Its pick-up was said to have spurred investor interest in the South Korean issuer, for whom covered bonds now offer an attractive funding option at home and abroad.

The bank follows compatriots Korea Housing Finance Corporation (KHFC) and Kookmin into the international covered bond market, after having established a $5bn global programme last month. The programme allows for issuance in various currencies, including euros and US dollars.

“KEB Hana has always aimed to diversify its funding sources,” said a spokesperson for the bank, “and to reduce funding costs as a counter-measure to the heightened market volatility last year. With plenty of high quality Korean won mortgage loan assets in hand, KEB Hana considered covered bonds as a key option that could help reduce its cost of funding.

“KEB Hana had been issuing in US dollars in the international markets as KEB Hana’s foreign currency needs were concentrated on US dollars,” they added. “However, KEB Hana wanted to achieve diversification in terms of funding source and investor base, which is possible with the new covered bond programme.”

The issuer chose to debut with a social bond, a format that KHFC and Kookmin have also used.

“KEB Hana has abundant social projects to match with the proceeds, which include funding to SMEs, start-ups and low-to-moderate income households,” said the spokesperson. “As investors have strong interest in buying ESG, including social, KEB Hana wanted to maximise the attraction by making a commitment that KEB Hana’s use of proceeds will be financing or refinancing social projects only.”

On Monday of last week (11 January) the mandate for the debut was announced as well as investor calls from Wednesday to Friday, when the issuer highlighted key aspects of its programme, which – like Kookmin’s, but not KHFC’s – is based on dedicated Korean covered bond legislation.

“The triple-A structure of KEB Hana and Korean covered bonds is in line with major covered bond jurisdictions globally due to the strength of the well established Korean Covered Bond Act, which confirms elements such as dual recourse, bankruptcy remoteness, segregation, among others,” said the spokesperson. “They include prime Korean residential mortgages that have historically exhibited low credit risk, low LTV ratios and geographical diversity. Regarding the social aspect, KEB Hana highlighted that a large portion of KEB Hana’s financing is targeted to socially vulnerable companies and individuals. including those materially impacted by Covid-19.

“Investors felt comfortable with KEB Hana’s covered bond structure as well as the social initiatives. We got the sense that investors are becoming more comfortable with Korean covered bonds in general.”

On Tuesday morning, KEB Hana Bank leads BNP Paribas, Citi, Crédit Agricole, JP Morgan and Société Générale went out with initial price thoughts of the mid-swaps plus 33bp area for a euro benchmark-sized five year social bond. An initial update reported books over €1bn, and after the spread was revised to 28bp+/-1bp on the back of over €1.7bn of demand, a €500m (KRW667bn) issue was priced at 27bp on the back of over €2bn of orders, including €100m joint lead manager interest. The final book good at re-offer was €1.85bn.

A lead banker said strong turnout for the investor calls last week had indicated a number of high quality accounts were looking at KEB Hana’s debut.

“I’d say it’s the most granular roadshow we’ve had for an issuer out of Asia,” he added. “There’s a very positive attitude towards the region.”

He said South Korea’s covered bond legislation as the basis for the issuance is a “huge plus”.

The pricing of core Eurozone, Nordic and even Canadian paper at single-digit spreads over mid-swaps made KEB Hana’s 33bp guidance enticing, according to the lead banker, with the overall lack of supply and forthcoming heavy covered bond redemptions also playing into the deal’s reception.

“Investors understand it’s going to be hard replacing all of that inventory,” he said, “so in passing up on this kind of trade, not only are you passing up on a very attractive spread, but it’s also a rare issuer, and if you don’t pick this up now, you might have to wait a year at least until you see the next Korean supply.”

Lead bankers said KEB Hana’s 27bp re-offer spread was flat to slightly inside fair value, based on KHFC and Kookmin outstandings, and had beaten expectations.

“Base case was something in the high 20s,” said another lead banker, “so we beat that objective by a basis point or two.

“With further issues out of Korea,” he added, “that spread will hopefully grind tighter as time goes by.”

KEB Hana’s debut achieved greater oversubscription and a higher absolute level of demand than euro benchmarks from Berlin Hyp, RBC and Sparebanken Sør Boligkreditt on the same day.

“A lot of investors are opening their eyes to the South Korean region,” said the lead banker, “and it was the strongest book of yesterday’s (Tuesday’s) trades, so we all were obviously very happy with the result.”

The KEB Hana spokesperson said that, following its successful €500m debut, it aims to be a regular issuer in the international covered bond market.

“Also, with high quality mortgage assets, KEB Hana could consider issuing Korean won covered bonds in the domestic market,” they added. “KEB Hana will flexibly consider each funding source subject to market conditions.”

Separate to its own covered bond issuance, KEB Hana – like several Korean banks – originates KHFC mortgage loan products, and such loans may constitute part of the cover pool of KHFC issuance, each of which has a distinct cover pool.