High yields a good bet to delay dollar bond issues

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High yields a good bet to delay dollar bond issues

South Korea probably will delay plans to sell its first dollar bonds in four years until borrowing costs retreat from six-month highs, say Mizuho Financial Group and Western Asset Management.

The extra yield that investors demand to hold South Korea’s sovereign securities instead of U.S. Treasuries reached 99 basis points last week, the biggest premium since Sept. 27, Bank of America Merrill Lynch data show.

The gap widened 20 basis points in the five days ended April 5, the biggest jump since September 2011, and shrank 1 basis point on Sept. 8.

“I don’t believe any Korean issuers will issue at the current funding levels,” said Jeffrey Yap, head of Asian fixed-income trading at Mizuho Securities Asia. “Everybody is waiting to see whether there’s a missile test that North Korea claimed it will hold. There’s a high chance that the spread will narrow again from here.”

The government plans to sell debt denominated in U.S. currency, and banks have been asked to provide feedback on the proposed issue, a person familiar with the discussions, who asked not to be identified because the details are private, said Tuesday. Daegu Bank also is considering the sale of dollar notes, a separate person close to that deal said earlier this month.

A Finance Ministry official who asked not to be identified declined to confirm any bond sale plans. A Daegu Bank official who also asked not to be identified declined to comment.

Yields on Korea’s 5.75 percent sovereign dollar bonds due April 2014 advanced seven basis points, or 0.07 percentage point, since April 5 to 1.21 percent, after jumping 19 basis points last week. Yields on longer-maturity bonds rose at a slower pace as rates on notes due in 2019 gained nine basis points this month to 2.08 percent, data compiled by Bloomberg show.

“If they want to place the issue, it shouldn’t be a problem,” said Boon Peng Ooi, who oversees $20 billion in Asian fixed income at Eastspring Investments Singapore. “It depends on whether they think the yield is acceptable. For a $1 billion issuance, 10-20 basis points is quite a lot of money. Unless I really need the money, I’d put it off.”

Borrowing costs are climbing as President Park Geun-hye seeks to revive the slowest economic growth in three years, create more jobs and bolster welfare spending. North Korea may detonate a nuclear device and carry out a missile test as early as this week, the South’s Defense Ministry said on April 8.

North Korean dictator Kim Jong-un’s regime warned last week that “the moment of explosion is approaching soon” and the country is poised to conduct a “smaller, lighter and diversified nuclear strike.” The North announced on March 30 that a “state of war” exists with the South.

North Korea’s decision to restart production of weapons-grade plutonium is credit-negative for South Korea as it has increased “the chance of a serious military clash,” Moody’s Investors Service analysts David Erickson and Thomas Byrne wrote in a report. Now is “not a good time” for South Korea to sell bonds overseas, according to Desmond Soon, a portfolio asset manager at Western Asset Management.

The Bank of New York Mellon index of Korean company American depositary receipts fell less than 0.1 percent in New York to 170.83, the lowest level since Sept. 6. The gauge has retreated over the past seven days, the longest streak of decline since the end of January.

Overseas funds have pulled more than $1.9 billion from Korean stocks since the North’s third nuclear test on Feb. 12, helping drive the Kospi Index down 1.6 percent and contributing to the won’s 4 percent slide to 1,139.33 per dollar. The Kospi’s 3.8 percent drop this year remains less than the 4.2 percent slide in the MSCI Emerging Markets Index. The won is 1.2 percent weaker than its average level for the past three years.

The cost to insure South Korea’s debt against nonpayment has climbed to the highest since September. Five-year credit default swaps tied to the nation’s notes rose 25 basis points in the past month to 88 in New York, according to data compiled by Bloomberg. Similar contracts for China, which shares the Aa3 credit rating at Moody’s Investors Service, added 13 basis points to 74.

“The cause of the big move is North Korea’s aggressive rhetoric,” said Mark Reade, a credit analyst at Credit Agricole CIB in Hong Kong. “Some investors are treating Korean assets with more caution, but I don’t expect investors to abandon the sector. The widening of spreads we have seen will ultimately subside.”

South Korea last sold dollar bonds in April 2009, when it issued $1.5 billion each of 7.125 percent notes due 2019 and 5.75 percent securities maturing next year. Bloomberg
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