Local banks not interested in covered bonds helpKorea’s plan to avoid another bailout of banks’ foreign-currency debts by allowing the issuance of covered bonds has one hurdle to clear: The country’s lenders say they’re not interested right now.
Three of Korea’s four largest financial groups by assets - Woori Finance Holdings, Shinhan Financial Group and Hana Financial Group - say borrowing costs are still so low that there’s no point tying up assets for covered notes, even with interest rates forecast to rise on U.S. stimulus cuts. Top-rated Korean companies pay just 31 basis points more than the government to borrow won, while the spread they pay over U.S. Treasuries for dollar debt is near the lowest since 2007.
Starting from April 15, banks will be allowed to sell bonds backed by specified pools of assets that stay on their balance sheets, securities designed to boost investors’ willingness to lend in times of stress. Finance Minister Hyun Oh-seok said in Seoul Wednesday the government, which was forced to assist lenders in both 1997 and 2008, is preparing for the impact of U.S. policy tightening and emerging-market volatility. Korean companies have $59 billion in foreign-currency notes due by the end of 2015.
“Banks aren’t sure about how much they can lower funding costs by selling covered bonds,” said Choi Jong-won, a credit analyst at Samsung Securities. “They may try to sell covered bonds if the spread of their unsecured bonds widens so that they need to cut borrowing costs.”
Covered bonds typically have higher ratings and lower yields than unsecured notes because they are guaranteed by the issuer and have a designated pool of assets that can be used to meet payments if the issuer cannot. They differ from a securitization, such as residential mortgage-backed notes, in that the assets remain on the bank’s balance sheet.
The global market for the bonds, which were pioneered in 18th-century Prussia, was worth 2.8 trillion euros ($3.78 trillion) by the end of 2012, up from 1.5 trillion euros nine years earlier, according to the European Covered Bond Council lobby group.
Hana Bank is not considering a covered bond sale at the moment as funding-cost reductions would be limited, according to an emailed statement from a bank spokesperson, who declined to be identified, citing company policy. Korea Exchange Bank, another unit of Hana Financial, doesn’t plan to sell the notes in the current interest-rate environment, according to a separate response to questions.
Woori Bank has no specific plans to sell covered bonds, while Citibank Korea and Standard Chartered Bank Korea aren’t considering offerings, according to emailed responses from each bank. Shinhan Bank sees few incentives to issue, according to e-mailed responses to questions.
KB Financial Group’s Kookmin Bank unit didn’t respond to queries.
Dollar-denominated securities sold by Korean issuers pay 2.9 percent, the least since June, according to JPMorgan Chase and Co. indexes. Yields on covered notes sold last February by Korea Housing Finance, which can issue under its unique act of incorporation, have risen 77 basis points since issue to 2.53 percent, according to Bloomberg pricing.
“Covered bonds are likely to become a new funding source for banks after the legislation,” Jeong Dae-ho, a credit analyst at KB Investment and Securities said in an interview Wednesday. “For investors, covered bonds will be considered attractive long-term investments because they can minimize capital loss when yields rise.”
The covered bond act, which was passed in December, will provide banks with a stable source of funding in a crisis and improve the country’s household debt structure by offering a long-term, fixed-rate funding tool, the country’s Financial Services Commission said in a Jan. 16 statement.
Korea spent 86.9 trillion won ($81 billion) from 1997-2002 to bail out failing banks in the aftermath of the 1997-8 Asian currency crisis, according to Public Fund Oversight Committee data. It handed over a further 1.25 trillion won to preemptively purchase soured assets from banks during the 2008 global credit crunch.
The Korean won has lost 2.6 percent this year amid a sell-off in emerging-market currencies that’s dragged down regional stock indexes and erased $3 trillion from global equity values. The nation’s main equity index has fallen 6 percent.
“Covered bonds will be a critical tool for Korean banks for foreign-currency funding in times of crisis,” said Kwon Dae-young, director of the banking division at the Financial Services Commission, in a Jan. 28 interview in Seoul. Bloomberg
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