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UPDATE 3-S.Korea may raise up to $3 bln in dollar debt sale

Published 04/08/2009, 03:48 AM
Updated 04/08/2009, 03:56 AM
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* May raise size of deal after orders reach $6.2 bln-source

* Final guidance set in line with prior indications-source

* Premiums seen less attractive than Indonesia, Philippines

* Emerging market issuers face choice: pay up or go away (Updates with final guidance, orders, recasts throughout)

By Rafael Nam and Lee Shin-hyung

HONG KONG/SEOUL, April 8 (Reuters) - South Korea increased the size of a dollar bond by as much as 50 percent to $3 billion after bowing to demands for higher returns to lure investors in the increasingly crowded global market for government debt.

South Korea had shelved the sale in September, refusing to pay the premiums investors were seeking, although analysts said it likely would have paid far less at the time than the 400-438 basis point spread over U.S. Treasuries it offered on Tuesday.

Like other emerging market issuers, South Korea is wrestling with how to price its debt as the world market is flooded with bonds from governments looking to fund huge economic stimulus plans and from private sector companies which are thirsty for cash and armed with government debt guarantees.

"Asian emerging countries will compete through premiums. Indonesia and Philippines offered wider spreads, making them very attractive," said Rachana Mehta, head of fixed income at KE Capital Partners.

"This pricing is more neutral (for South Korea). We may not see a big rally when the bonds start trading, but at least we won't see a big downside, either."

The decision to increase its fund raising target from the original $2 billion came after the orderbook reached $6.2 billion so far, said one source, who like others quoted in this article is not authorised to talk publicly about the sale.

The size of the offer is large by Asian standards, potentially matching the $3 billion raised by Indonesia this year, though below the $5 billion global debt sale by Hutchison Whampoa <0013.HK> in 2003 that remains the biggest ever from the region outside Japan.

Still, investors said South Korea is offering less attractive premiums than Indonesia or the Philippines, both of which sold sovereign debt this year.

South Korea itself is competing against the debt guarantee it has offered to its banks, which are expected to offer higher premiums, making their debt more attractive.

It set its final guidance at 400 basis points over equivalent U.S. Treasuries for the five-year notes it is offering and 437.5 points over U.S. Treasuries for its 10-year notes, another source said on Wednesday.

It aims to raise $1-$1.5 billion per tranche. The sale is expected to price by Wednesday morning during U.S. hours.

The dollar bond sale will be South Korea's first since 2006, and will cost it far more than that deal as the global financial crisis makes investors wary about taking on risk.

Its proposed pricing on this week's sale is far above the spread of 70 basis points over Treasuries it paid for a 10-year dollar-denominated bond nearly three years ago.

Even so, its orderbook falls short of Indonesia's $7.3 billion in orders.

Seoul will put the funds raised into a state fund intended to stabilise its foreign exchange market after the won tumbled to 11-year lows in early March on investor concerns over U.S. dollar shortages, which have decreased somewhat since then.

For a graphic, please click: http://graphics.thomsonreuters.com/apr09/KR_CDS0409.jpg

For a factbox comparing pricing on recent Asia bond deals, see [ID:nHKG265883]

PRICE TUSSLE

The typical tussles between issuers looking to keep their borrowing costs down and investors looking for bigger premiums are expected to be especially intense this year, particularly for emerging market issuers that are considered riskier investments.

South Korea is not only competing against issuers from elsewhere, it has to contend with fundraising by the country's banks.

"In the future there will be a lot of new issuance from Korea especially in government-guaranteed paper and bank papers. If given the choice I prefer the government guaranteed debt because of the higher premiums," said KE Capital's Mehta.

Hana Bank last week priced $1 billion in three-yar notes at a spread of 542.6 basis points over equivalent Treasuries, far above the premiums offered by South Korea for shorter-term debt.

More South Korean banks are expected to sell global debt after the government said on Tuesday it planned to extend a deadline for its government guarantee by six months and allow maturities of up to five years. [ID:nSEO155641]

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