Debt deals propping up foreign banks in S.Korea

SEOUL/HONG KONG (Reuters) - In a country where banking fees are famously low compared to other regions, foreign banks in Seoul are finding that debt deals are what's lining their pockets right now.

While stiff competition from domestic brokerage houses has put a pinch on equity offering fees in South Korea, foreign banks have secured handsome fees from debt capital markets this year.

Debt capital market fees for both domestic and cross-border deals nearly doubled to $147.1 million in South Korea in the first half of this year, compared with the same period of 2008, Thomson Reuters data shows.

From January to mid-July, debt capital market proceeds jumped 53 percent in South Korea to $64.7 billion. By comparison, Australia's fell $20 billion to $88.6 billion the same period.

Debt offering fees turned higher in South Korea this year, as companies were willing to pay up for dollar bond issues when the window for global financing was virtually shut.

Export-dependent South Korea was one of the most active offshore bond issuers in Asia, facing a large volume of foreign liabilities maturing.

The inverse relationship between debt and equity fees may not be a continuing trend, and debt underwriting fees would likely fall back again, as capital markets have stabilized and the rush to new dollar supply seems to have run its course, bankers say.

Still, banks are pinning hopes on a steady flow of offshore bond issues from South Korea's energy companies and banks, and demand for tailored services from business groups in the restructuring process.

"Volatility in capital markets will recede, and this may lead some houses to make aggressive offers for pricing," said an official of a top South Korean brokerage house's debt capital team, who declined to be identified on concerns that his view might affect his company's business.

"Sovereign and quasi-sovereign offers would continue to pick up as they need dollars to refinance debt and for operations and M&As."

Korea Railroad Corp, the country's national railroad operator, is gauging the timing of a planned five-year dollar-denominated bond. The country's National Agricultural Cooperative Federation, or better known as Nonghyup, is looking to raise $700 million in a bond sale later this year.

The upcoming deals follow Korea National Oil Corp's $1 billion bond sale in July and the Export-Import Bank of Korea's (KEXIM) $1.5 billion of 5.5-year bond issue last month.

Deutsche Bank (DBKGn.DE) was the most active foreign bank in advising South Korean companies' overseas debt offerings, followed by Standard Chartered (STAN.L) (2888.HK) and Bank of America-Merrill Lynch (BAC.N), according to Thomson Reuters data.

FEE SANITY

The won's rebound and tightened spreads in South Korean foreign currency debt were behind South Korea's active offshore issues.

Currency swap rates were also favorable for South Korean companies to hedge against foreign debt and helping to fill banks' pocketbooks.

The combined corporate bond proceeds of South Korea and China made up 68.6 percent of the Asia, ex Japan, market share, between January and mid-July, according to Thomson Reuters.

"Banks are asking for more sanity to continue to provide better service," said the head of a foreign investment bank in Seoul on condition of anonymity on concerns about revealing his in-house view

Debt underwriting fees tend to be set on a 'best effort-made basis', but usually below equity offerings' fees. Debt capital market fees rose to 50 basis points for Korea Development Bank and KEXIM's issues in February, from 10-15 basis point fees they paid last year. Now bankers see the DCM fees dropping back to around 30 basis points for the remainder of this year.

Some global banks are targeting big corporate clients which are willing to pay high fees for strategic decisions.

"Recently, banks are desperate on getting league table credit, so they will go for super low fees just to be on the list," said an investment banker of a foreign brokerage house in Seoul.

"But there are a lot of issuers who will pay higher fees for idea generation trades such as structured and tailored to specific clients needs."

(Editing by )