Korea’s largest commercial bank and private sector mortgage lender Kookmin Bank has closed the region’s first covered bond offering, raising US$1 billion in the process.
The five-year covered bond offering, issued on May 7 under Rule 144A/Regulation S, received AA and Aa2 ratings from Standard & Poor’s and Moody’s respectively and attracted strong demand as a result.
Peter Kilner, Clifford Chance
Sole structuring adviser HSBC targeted a more conventional investor base than traditional European covered bond investors by adding credit card receivables to the residential mortgage asset pool. This differs from the European convention of mortgage or public sector-only cover pools.
Hong Kong-based partner Walter Son led an Allen & Overy team acting as transaction/structuring counsel to joint lead managers HSBC and Citi. This follows the magic circle firm’s work for BNP Paribas in February, when it advised on the first issue of multi-jurisdictional public sector covered bonds. Kim & Chang - led by foreign attorney Hoin Lee - and McCann Fitzgerald advised the joint lead managers on Korean law and Irish law respectively.
Tokyo-based Peter Kilner [pictured] and Hong Kong-based Alex Lloyd led the Clifford Chance team advising KB Financial Group unit Kookmin, with Tokyo counsel Leng-Fong Lai advising on the swap aspects of the deal. Shin & Kim acted as Korean counsel to the issuer with Young Hee Jo leading its team.
The Korean government is known to have been actively involved in the creation of Kookmin’s covered bond offering - making sure the structure fit the laws of asset-backed debt - as it tries to encourage other domestic issuers such as Shinhan Bank and Woori Bank to follow suit.
Kilner told Asialaw: "It's quite a good time to do these deals as there is more downside protection than upside benefit - as there is with say convertible bonds."
Elsewhere, Westpac NZ and ASB – New Zealand subsidiaries of Australian banks – have reportedly taken steps in recent weeks towards the issuance of covered bonds, which is prohibited in Australia under the country’s Banking Act (though the Australian parliament has been reviewing this position).
"We are all very hopeful that this will be a growing market, and there has been lots of talk and a number of conference calls about covered bonds," said Kilner. "It comes down to ring-fencing the assets legitimately, and it certainly helps that somebody has got one of these away."
Similar in many ways to asset-backed securities, covered bonds are debt securities backed by cash flows from mortgages or public sector loans. They are corporate bonds but with the enhancement of having recourse to a pool of assets that secures or ‘covers’ the bond if the originator becomes insolvent.
This enhancement typically, though not always, results in the bonds being assigned AAA credit ratings, which explains why they are favoured by issuers and investors.
Investors also favour them because the debt and the underlying asset pool remain on the issuer’s financials. Issuers must ensure that the pool consistently backs the covered bond as, in the event of default, the investor has recourse to both the pool and the issuer.
"The difficulty is that whereas Europe has an investor base very much used to this product, we don’t have that in Asia," said Kilner. "With a straight bond issue, investors have access to the credit of a company but not its assets. With a securitisation, it is the other way round."
He added: "With a covered bond, you effectively get the best of both worlds. So the issue is persuading investors that the benefits of both worlds, as well as the pricing, are worth the hassle of structuring the deal."
The UK passed its covered bond legislation in February last year, though bankers and lawyers immediately called for amendments. And the US has recently shown an increasing interest in covered bonds, with former treasury secretary Henry Paulson announcing on July 28 last year that the Treasury would attempt to kick-start a market for these securities in the US. This was primarily to provide an alternative form of mortgage-backed securities.