DEALTALK-KEXIM, KDB bond sales could spur more S.Korea bank debt

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By Kim Yeon-hee and Umesh Desai

SEOUL/HONG KONG Jan 12 (Reuters) - Export-Import Bank of Korea (KEXIM) and Korea Development Bank (KDB) could together raise as much as $2 billion from bond sales this month to become the first Asian lenders to tap global capital markets this year.

Their moves, following Philippines' $1.5 billion sovereign bond sale last week, may become a litmus test for other South Korean banks and should create a benchmark for them, while providing fresh clues on whether the global liquidity squeeze is finally easing.

South Korean lenders, led by Kookmin (105560.KS) and Shinhan (055550.KS), have struggled to raise dollars since the global financial crisis pummelled the won KRW= and crippled the sector which is highly dependant on wholesale funding for finances.

"It is right for government banks to go first to test investor reaction and demand to South Korean debt, and create a benchmark," an official of a top South Korean bank's capital market team.

While KEXIM is planning to sell a benchmark-sized, 5-year dollar bond as early as this week, KDB is expected to float 3-year debt later this month. Finance Minister Kang Man-soo said earlier this month both banks would launch a $1 billion deal each, although the deal sizes are yet to be decided.

KDB and KEXIM declined to confirm.

"There is a lot of pressure for Korean institutions to issue because they have been funding in dollars and they have been relying on wholesale capital markets," said Devendran Mahendran, a credit analyst with HSBC.

According to a Standard Chartered Bank report, the foreign currency component in the funding structure of Korean banks has increased to 11.3 percent in mid-2008 from 9.1 percent in 2004, while the deposit proportion has fallen to 59.1 percent from 70.3 percent in the same time.

South Korea has grappled with dollar shortages since last year when there was a scramble to replace the huge amounts of short-term foreign debt that global banks were withdrawing.

While the strains have eased, some market watchers are concerned that liquidity shortages could re-emerge and that the economic situation may worsen -- both factors that could lead investors to demand higher premiums from the issuers.

"The focus would be the impact on the real economy from the global slowdown and also the local liquidity tightness that is still there," said Narumol Charnchanavivat, credit analyst with Standard Chartered Bank.

LOTS OF INVESTOR CASH ON THE SIDELINES

Market sources say KEXIM's 5-year deal is likely to be priced at around 600-650 basis points over mid-swaps but the bank has not yet provided official guidance.

KEXIM's 5-year credit default swaps EIBA5YUSAC=R -- insurance-like contracts that protect against defaults and restructuring -- are trading at around 310 basis points (bps) and its bonds maturing in 2014 KR018582708=RRPS, an inactive bond, last traded at around 620 bps over mid-swaps.

"They definitely have to come out with a premium of 30-50 bps or slightly more," said Rachana Mehta, head of fixed income at KE Capital Partners referring to the excess yield over those on the existing bonds the two banks would have to pay.

But she said the issue would receive a good response.

"People are sitting on a lot of money and with rates being so low across the globe, the response will be good."

Massive government spending plans and aggressive central bank interest rate cuts have raised hopes liquidity will abundant, bringing Asian credit spreads to the narrowest in almost four months.

And success for KEXIM and KDB would see others follow quickly.

Major South Korean banks, including Kookmin, Woori and Hana, said they were holding off setting 2009 funding plans until KDB and KEXIM completed the first tranches of issues.

"We are looking closely at KDB and KEXIM's sales," a Hana Bank official said. "If they are oversubscribed, we expect it to provide a good momentum to us."

(Editing by Kim Coghill)