Foreign demand high for $3 billion Korean bond sale

Korea sold $3 billion worth of dollar-denominated foreign currency stabilization bonds yesterday as optimism grew among overseas investors that the local financial market may have started a slow recovery process, according to the Finance Ministry.

The state debt sales came seven months after a botched attempt to sell $1 billion of the foreign currency-denominated bonds. The last time Korea succeeded in issuing such bonds was in November of 2006.

“We’ve successfully issued $3 billion of foreign currency stabilization bonds as of 1 a.m. today as investors from the United States, Europe and Asia showed substantial interest in them,” a ministry spokesman said.

The spokesman said the government initially planned to sell $2 billion, but upped the amount due to higher-than-expected demand.

According to the ministry, $1.5 billion among the bonds carry a five-year maturity while the other $1.5 billion have 10-year maturities.

The interest rates on the five-year and the 10-year bonds were 5.864 percent and 7.26 percent, respectively, which the government says reflects the growing favorable sentiment about the local market.

Similar rates are charged for government bonds issued by Abu Dhabi of the UAE, which has a sovereign rating two or three notches higher than Korea, the ministry said.

The spread on the five-year bonds was set at the U.S. Treasury rate plus 400 basis points. The rate on $1.5 billion of 10-year bonds was at the U.S. Treasury rate plus 437.5 basis points.

In 1998 when Korea was hit hard by the Asian financial crisis, the spread on the 10-year bonds was 9.083 percent. “It is not a bad condition to be in given the current market situation,” said Park Hyun-joon, an official at Hana Bank.

After the issuance of the currency stabilization bonds, the Korean currency rose as much as 32 won against the dollar, closing at 1,322.50 won.

“It has given Korea an opportunity to prove that its economy is solid,” said Kim Ik-joo, director general of the international finance bureau of the Ministry of Strategy and Finance. “Given the relatively low rates charged for the bonds and the sizable amount of the issuance, it will also make it easier for local banks and state-run companies to seek foreign capital.”

The spread on foreign currency stabilization bonds is a benchmark for the rates on overseas borrowing by the private sector. According to market watchers, the spreads on overseas bonds to be issued by local companies will be set at the foreign currency bond rate plus 0.5 to 1 percentage point.

Kim said the government will consider issuing additional dollar-denominated state debt in overseas markets this year.

“We will decide on an additional issuance after taking into consideration market conditions at home and abroad,” Kim said. The scale and timetable have yet to be determined, he added.

Last September, the government withdrew a plan to raise $1 billion in overseas markets as the collapse of Lehman Brothers and the subsequent fallout in the global financial market left overseas investors jittery about buying bonds in Asia except from Japan.

By Moon Gwang-lip [joe@joongang.co.kr]