In a frantic year for investment-grade debt, one deal showed just what was possible for a top Asian issuer. For a deal that smashed through the Korean sovereign and forced a re think of risk pricing, Samsung’s US$1bn five-year bond is IFR Asia’s South Korea Capital Markets Deal of the Year.
The astounding performance of investment-grade credit opened new doors for Asian issuers throughout the year, but a tightly priced benchmark from South Korea’s Samsung Electronics stood out as a defining deal in a crowded market.
The US$500m five-year bond was Samsung’s first in the US dollar market since 1998, but, more importantly, it was the first time a South Korean company had priced inside the sovereign.
The Samsung that came to market nearly 15 years ago is nowhere near the company of today, boasting a market cap of more than US$170bn.
When Samsung started talking to banks about a return to the dollar markets, the initial response was to bundle it up with other Korean issuers, suggesting the company could pay as much as 200bp over Treasuries on a five-year bond.
In the weeks before Samsung’s issue, the Republic of Korea’s 5.125% sovereign bonds due December 2016 were stuck in a range of 150bp–200bp over Treasuries.
Samsung’s bookrunners, Bank of America Merrill Lynch, Citigroup, Goldman Sachs, JP Morgan and affiliate Samsung Securities, however, thought differently.
“Most banks were thinking of allocating the trade with the usual EM investors,” said Mark Follett, head of high-grade DCM for Asia at JP Morgan. He argued that Samsung should be competing for attention with the likes of IBM, Texas Instruments, Oracle, Dell, Hewlett Packard and Cisco.
However, as Samsung waged a high-stakes legal battle with US rival Apple, it felt confident it could stand up as an equal to the American blue-chip in its home markets.
The company hit the road in late March, spending a whole week in the US to meet the biggest investment-grade accounts there and sell its story. Bankers on the trade said that, even when an institution had an EM portfolio manager, they would try to meet the investment-grade contact instead.
The strategy paid off. On April 2, Samsung started sounding Asian accounts for a potential five-year deal in the area of 100bp over US Treasuries. At that time, South Korea’s government-linked companies were trading in the low 200s, and many Asian investors shunned the offering.
However, as orders started to come in, bankers felt more confident of being able to get a really tight transaction. At the New York open, leads were already telling US accounts to look at a high double-digit spread for the bond. Official price talk emerged in the morning at 90bp over.
With demand coming in strong and from serious accounts that wanted full allocations, guidance was soon moved 10bp tighter. The US$4.37bn order book from 160 accounts read like a who’s who of the investment-grade world.
Ultimately, Samsung printed the lowest five-year US-dollar coupon for a corporate issuer in Asia. The electronics giant sold the US$1bn five-year Reg S/144a bond at 99.634 to yield 1.829% on a 1.75% coupon. The level was 80bp over US Treasuries, one of the tightest spreads for any Asian issuer and some 20bp inside initial price talk.
Yet, while the trade was super-tight by Asian standards, the US investment-grade fund managers who took the majority of the bonds still got a good deal. The notes ended the review period bid at 101.5.
The deal forced a wholesale rerating of South Korean credit, with the sovereign spread over Treasuries pulling sharply tighter in the days that followed and grinding steadily tighter over the rest of the year. It would be several months, however, before state-owned Export-Import Bank of Korea would break the 100bp barrier, underlining Samsung’s success in differentiating itself from other Korean issuers.
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