The Republic of Korea opened its Kangaroo account on Tuesday with a heavily oversubscribed and dramatically timed A$450m (US$293m) five-year print that underscores the increased depth of the Australian dollar market.
The first sovereign Kangaroo since a 10-year Austrian deal in 2004 priced just a few hours before President Yoon Suk Yeol declared martial law in a shock TV address – though he promptly reversed his decision amid widespread opposition.
"If conditions precedent are breached as outlined in the dealer agreement between pricing and settlement, then the bond could be pulled due to a material adverse change," a banker away from the deal suggested early Wednesday.
However, with the political situation stabilising and no negative implications for Korea's sovereign ratings, the transaction looks set to proceed to settlement on December 10.
“S&P sees the negative impact on market sentiments as being contained within Korea’s current credit metrics and unlikely to trigger a rating change in the next year or two,” the rating agency said on Thursday.
“The martial law declaration and subsequent withdrawal ... are not expected to impact the prices of sovereign bonds or bonds issued by government-linked entities," said Lee Hyukjoon, director at NICE Investors Service. "The fiscal health and debt repayment ability of the South Korean government remain strong.”
The well received and well executed transaction certainly achieved the three goals the government had set out.
These were to broaden the global investor base for South Korean bonds, establish a benchmark for other South Korean Kangaroo issuers and promote the country's strong external and fiscal soundness.
"The first-ever issuance of an Australian dollar-denominated foreign exchange bond holds great significance as it diversifies foreign currency funding channels and enhances the benchmark role of foreign exchange stabilization bonds," said Yoo Chang-yeon, a senior official from the finance ministry, after the bond priced.
The ministry hopes the issue will attract new investment from Australia, Korea's fourth-largest trading partner by imports, which has one of the world’s biggest pension fund and asset management industries.
ANZ, Mizuho and Nomura were joint lead managers for the 4.51% December 10 2029s which printed at par to yield asset swaps plus 55bp. Pricing was inside initial 60bp area and revised 57bp area guidance.
This was around 10bp wide of Triple A rated World Bank Kangaroos and circa 20bp inside government-guaranteed agency Export-Import Bank of Korea, a frequent Kangaroo issuer, which shares the sovereign’s Aa2/AA/AA– ratings.
A larger deal was on the table given the hefty A$2.63bn final order book, but the issuer had publicly targeted a maximum US$300m-equivalent trade beforehand.
The scale of unfilled orders helped the new issue perform strongly on the break with the bond tightening to asset swaps plus 47bp–48bp, before widening out when the political crisis erupted.
The bond was seen at 51bp–53bp in the grey market on Friday with the political situation still considered fluid, ahead of a parliamentary impeachment vote for President Yoon on Saturday.
South Korea is no stranger to offshore markets with several US dollar and euro-denominated bonds outstanding. The Kangaroo debut priced a handful of basis points back of its Yankee curve.
South Korea also printed a debut ¥70bn (US$460m) four-part Samurai trade in September 2023 and was the first sovereign issuer of Panda bonds in December 2015.
The big question now is whether other sovereigns will consider accessing the Kangaroo market, whose long-standing diversity benefits have been augmented by size and execution certainty.
A DCM banker away from the deal stressed that sovereigns would only issue Kangaroos if they stack up with the issuer’s key markets. Links to the Australian economy would be another incentive.
The biggest potential feathers in the Kangaroo cap would be APAC’s two largest sovereign issuers, the Republic of Indonesia (Baa2/BBB/BBB) and the Republic of the Philippines (Baa2/BBB+/BBB).
These would likely draw the Asian crowds, though Australian funds may be more cautious, according to a syndication manager who noted Australian investors had built up exposure to highly rated Korean agencies and banks over many years before the sovereign debut. No issuers from the Philippines or Indonesia have accessed the Australian dollar market before, according to IFR data.
(Additional reporting by Sara Velezmoro.)