Korea Bank Funding Costs Rise to Record on Woori Woes

By Kim Kyoungwha

Feb. 17 (Bloomberg) -- The cost for South Korean banks to borrow dollars in the swap market rose to a record after Woori Bank decided not to redeem $400 million in bonds and sought $1.4 billion in state funding.

Moody’s Investors Service said on Feb. 13 that the lender’s decision not to exercise an option for early repayment of 2014 debt will roil investors, who expect borrowers to repay callable securities at the first opportunity. Woori, South Korea’s second-biggest bank, plans to raise more than 2 trillion won ($1.4 billion) from a state-backed recapitalization fund.

“The actions of Woori will make it more difficult for commercial banks to access the international markets,” said Jason Rogers, credit analyst with Barclays Bank Plc in Singapore.

South Korea has as much as $160 billion of external debt maturing over the next two years, compared with national foreign-exchange reserves that shrank 23 percent in the past year to $200 billion, according to UBS AG, the world’s second- largest currency trader. Financial Services Commission Vice Chairman Rhee Chang Yong said Feb. 5 that banks still face difficulties obtaining U.S. currency.

The one-year cross-currency swap rate on the won slumped to a record minus 1.6 percent today from minus 1.3 percent yesterday, before trading at minus 1.1 percent. The gauge of availability of dollar funding, which averaged 3.3 percent last year before Lehman Brothers Holdings Inc. collapsed, may decline to minus 2 percent by March, said Choi Seok Won, head of research with Samsung Securities Co. A minus figure shows borrowers of dollars need to make interest payments.

“We see no sign of an end to global crisis,” Choi said. “Banks, companies and state agencies are finding it harder to get dollar funding.”

European Banks

Moody’s last week cut credit ratings for Kookmin Bank, the nation’s biggest lender, and seven other South Korean lenders, citing their dependence on the government for foreign-currency funding. Banks in Australia, Sweden and eastern Europe are also in trouble as economies in the region deteriorate, it wrote in a report released today in London.

In a cross-currency swap, investors pay or receive a variable interest rate in one currency in exchange for a fixed rate in another currency. In Korea, local banks typically pay a fixed rate in won in exchange for a floating rate in dollars.

The Bank of Korea, which has extended banks $16.35 billion of the $30 billion swap deal with the Federal Reserve, auctioned off $2 billion, using the nation’s currency reserves today, the central bank said. The outcome of the sale was announced on the bank’s Web site.

“The funding situation for longer-term borrowing is getting worse as banks are increasingly tapping swap markets to secure funds,” said Kang Soo Jong, a swap trader with Shinhan Bank in Seoul. “Loans and bonds are difficult to get.”

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;