Korea Sells $3 Billion of Bonds to Bolster the Won

By Kim Kyoungwha and Seonjin Cha

April 9 (Bloomberg) -- South Korea sold $3 billion of dollar-denominated bonds overseas, after attracting orders for more than double that amount, to bolster its defense of the won.

Five-year notes maturing in April 2014 were sold at a yield of 5.864 percent, 400 basis points more than similar-maturity U.S. Treasuries, and 10-year bonds at a premium of 437.5 basis points, the finance ministry said in a statement. A security expiring in September 2014 yesterday yielded 318 basis points more than U.S. debt, according to prices from BNP Paribas SA.

Proceeds from South Korea’s first international bond sale since 2006 will be used to support a currency that tumbled 27 percent against the dollar in the past 12 months, Asia’s worst performance. The won slumped as overseas banks hoarded dollars following the September collapse of Lehman Brothers Holdings Inc. and a global recession battered exports, starving South Korea’s banks and companies of foreign exchange needed to pay debt.

“Any risk of short-term liquidity or balance of payments shocks have now become negligible,” said Ernesto Bettoni, a London-based investment specialist at Fortis Investments, which oversees $225 billion globally. He said the funds he helps manage bid for the 10-year bonds in yesterday’s sale.

South Korea’s currency reserves slid to $206 billion at end-March, from a record $264 billion a year earlier, as policy makers lent money to enable banks and companies to pay overseas debt. The government has expanded its access to foreign exchange in the past six months via currency swaps with the U.S., Japan and China, and this week said it will extend a $100 billion state guarantee on banks’ foreign debt until the end of 2009.

‘Prepare For Uncertainty’

Moody’s Investors Service rates South Korea’s debt A2, the sixth-highest investment grade. That’s on a par with Poland, whose dollar-denominated bonds due January 2014 yielded 5.317 percent yesterday, 55 basis points less than the new Korean five-year bond, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

South Korea sold $1.5 billion of each tranche of bonds, boosting this year’s tally for global debt sales by emerging- market nations to $27 billion. That compares with $30 billion for the whole of 2008, according to data compiled by Bloomberg.

The finance ministry said yesterday’s sale drew orders totaling $8 billion and was a pre-emptive measure to “prepare for uncertainty in global financial markets.”

The Korean currency strengthened 0.9 percent to 1,343.05 per dollar as of 12:10 p.m. in Seoul, paring this year’s loss to 6.1 percent, still the biggest drop among the 10 most-traded Asian currencies tracked by Bloomberg. It’s jumped 16 percent in the past month, a performance second only to the New Zealand dollar among some 170 currencies tracked by Bloomberg.

Improving Outlook

Investor interest in the sale “fits in with the fact that the optimism in emerging markets is continuing,” said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York in a telephone interview. “The outlook is improving and Korea has been holding up. Its currency really was getting hammered earlier in the year, and it’s kind of snapped back.”

The extra yield investors demanded to own developing-nation debt instead of U.S. Treasuries increased four basis points to 573 yesterday, according to JPMorgan Chase & Co.’s EMBI+ Index. The spread averaged 650 points this year, down from a six-year high of 865 in October.

South Korea’s government in September scrapped plans to sell $1 billion of bonds as borrowing costs soared after Lehman’s bankruptcy filing.

Bank Finances

The new bonds will act as a benchmark for companies and banks tapping overseas debt markets. State-owned Export-Import Bank of Korea plans to meet investors in the U.S. to gauge demand for a potential bond sale later this year, a company official said on March 25.

Hana Bank, South Korea’s fourth-biggest lender, sold $1 billion of three-year notes backed by the government last week, becoming the first company to tap the state guarantee. The 6.5 percent debt was priced to yield 543 basis points more than Treasuries of similar maturity.

The government’s 4.875 percent dollar bond due in September 2014, which was sold in September 2004, yielded 5.03 percent yesterday. That’s 15 basis points more than a similar-maturity note issued by the Philippines, whose BB- rating at Standard & Poor’s is seven levels below South Korea’s A grade.

“Korea is A rated and trading like BB,” Fortis’ Bettoni said. “Although the country is being hit hard by the global downturn and its private sector short-term debt rollovers are significant, a lot of this is priced in.”

To contact the reporter on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.netSeonjin Cha in Seoul at scha2@bloomberg.net