Bloomberg News

South Korea Issues Debt as Credit Risk Near Six-Year Low

June 03, 2014

South Korea completed its first sale of 30-year dollar-denominated bonds as well as an issue of euro notes after the cost of insuring the nation’s debt against default slid to a six-year low.

Asia’s fourth-largest economy sold $1 billion of 30-year dollar bonds at 72.5 basis points over Treasuries to yield about 4.14 percent, according to data compiled by Bloomberg. It also issued 750 million euros of 10-year notes at 57 basis points above midswaps, the nation’s first issuance in the European currency since 2006. The dollar bond sale drew 4.5 times more bids than offered, while the euro debt attracted 4 times the amount, the finance ministry said in an e-mailed statement.

South Korea’s sale follows a five-month run of gains in 30-year U.S. Treasuries that was the longest winning streak since 2006 and drove yields to the lowest level since June 2013. The proceeds will add to the nation’s record currency reserves, which are climbing amid speculation the central bank has been buying dollars to check the won’s advance to a six-year high. Exports fell 0.9 percent from a year earlier in May, the biggest decline since September, government data show.

“With U.S. Treasury yields having compressed year-to-date and global growth headwinds rising, investors are scrambling for safe-haven assets that provide some additional yield,” Mark Reade, a Hong Kong-based analyst at Mizuho Securities Asia Ltd., said yesterday.

Indonesia, Philippines

The biggest sovereign dollar sale this year-to-date has come from Indonesia, which raised $4 billion in January. That matched a previous record set by South Korea in April 1998, when it issued $4 billion of U.S. currency bonds in a two-part offering.

Pakistan, the Philippines and Sri Lanka have also sold debt in dollars since the end of 2013, according to data compiled by Bloomberg. Sovereign notes in the U.S. currency from Asia excluding Japan have gained 9.02 percent since Dec. 31, JPMorgan Chase & Co. indexes show.

“This is our first time to issue 30-year dollar bonds, which signifies international investors’ strong confidence in the country’s credit health and economic outlook,” Finance Ministry Director Yoon Tae Sik said by phone yesterday. “This is good timing because global interest rates are likely to rise in the second half of this year.”

Default Swaps

Credit-default swaps insuring South Korea’s sovereign debt against non-payment for five years fell to 53 basis points on May 30, the least since January 2008, according to data provider CMA. That compares with 73.8 basis points for China, whose sovereign debt is rated Aa3 by Moody’s Investors Service, the fourth-highest investment grade and the same as South Korea.

South Korea’s government sold 30-year local-currency debt on Monday at a yield of 3.575 percent, while similar-maturity U.S. Treasuries yielded 3.44 percent as of 4:43 p.m. in New York. Indonesia, which is rated the lowest of 10 investment grades at Moody’s, sold $2 billion of 30-year notes in January and the securities yield 5.61 percent.

Sergey Dergachev, who helps oversee about $10 billion in emerging-market debt as a senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said he is interested in buying both the dollar and euro notes being offered by South Korea.

“We are very interested in both tranches, mostly for diversification purposes and the scarcity value we get from getting exposure in the primary market to one of the most improving sovereign credit matrices in emerging-market Asia,” he said yesterday in an e-mail interview.

Capital Inflows

Overseas investors boosted holdings of South Korea’s equities by 628 billion won ($614 million) and local-currency debt by 1.3 trillion won this year as of end-April, Financial Supervisory Service data show. The nation’s current-account surplus was $7.125 billion in April, central bank figures show, and the won has strengthened 10 percent versus the dollar in the past 12 months, the biggest gain among 24 emerging-market currencies tracked by Bloomberg.

The yield for South Korea’s 3.875 percent dollar bonds due 2023 dropped to 2.94 percent on May 29, the lowest since the securities were issued in September last year. The 4.25 percent euro debt maturing in 2021 yielded 1.96 percent on June 2, the least since the securities were sold in 2006.

To contact the reporters on this story: Kyungji Cho in Seoul at kcho54@bloomberg.net; Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net; James Regan at jregan19@bloomberg.net Andrew Janes


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