Instability is pointing bond buyers to Korea

Defaults in China and sanctions against Russia are good news for Korea because they narrow the field of attractive emerging markets, the top arranger of the nation’s international bond sales said.

The spread between Korean notes and equivalent U.S. Treasuries, which reached a seven-year low of 131 basis points, has room to narrow slightly, said Whang Youn-sung, Seoul-based director of global capital markets at Bank of America’s local unit. Korean offshore bond sales rose 59 percent this year, as dollar-denominated issuance from China and Hong Kong slipped 19 percent.

“Emerging-market investors buy Korean paper because there are few safe assets to buy other than Korean paper,” said Whang.

“Developed market investors buy because Korean paper is cheaper than other securities with similar credit ratings.”

Dollar bonds of Chinese real-estate developers slumped after government officials familiar with the matter said Zhejiang Xingrun Real Estate collapsed with 3.5 billion yuan ($565 million) of debt due. The crisis in Crimea, claimed from Ukraine by Russia after a March 16 referendum, may lead to difficulties for Russian companies amid capital flight and falling business confidence, Fitch Ratings analysts wrote in a March 6 report.

The average dollar-denominated bond yield for Korean issuers has reached a record low of 3.43 percent, according to a JPMorgan Chase & Co. index. Yield premiums on Chinese securities in the U.S. currency rose to 384 basis points on March 17, the highest since Aug. 30, the data show.

“Many high-grade bond investors in the U.S. that we rarely see in the Korean dollar-bond market participated in our latest sale,” JW Lee, finance team leader at Hyundai Capital Services, which is controlled by Hyundai Motor, said in an email interview.

Investors in the U.S. bought 65 percent of Hyundai Capital’s $500 million issue of three-year floating-rate notes, according to a person familiar with the matter, who asked not to be identified because the details are private.

The bonds sold at 80 basis points more than the three-month London interbank offered rate this month.

“But because of the turmoil in Ukraine and China, Korean paper is luring more investors,” Whang said.

Bloomberg