Foreign Exchange Equalization Bonds
The Korean government succeeded in issuing foreign exchange equalization bonds worth US$1 billion. Investors flocked to lower the actual issue rate to the lowest level ever.
“We’ve successfully issued the US dollar-denominated bond with a maturity of 10 years as of 1:15am,” said the Ministry of Strategy and Finance on September 5. The bond issue rate is 4.023%, 115bps higher than that of a 10-year US Treasury Bond, and the coupon rate is 3.875%.
“This is the first time that the issue rate and coupon rate reached 4.023% and fell below 3%, respectively,” International Finance Bureau director Yoon Tae-shik at the ministry remarked, adding, “The figure is about 17bps lower than the bond issued by the government of Chile that has a similar level of sovereign credit rating.”
At first, the rate had been 135bps higher than the US Treasury Bond rate. However, the purchase orders piled up to over US$5 billion to lower it to the level of T+115bps. In particular, many leading global investors showed keen interest, including central banks, sovereign wealth funds (33%) and asset management companies (36%).
This is the first foreign exchange equalization bond issued by the Korean government since April 2009. At that time, the amount had been US$3 billion. The ministry is expecting that the bond will lead to the issuing of an increasing number of private-sector bonds down the road, while the low benchmark rate helps decrease the borrowing costs. In addition, it predicted that the international creditworthiness would be improved as an equalization bond, which is an underlying asset of the credit default swap (CDS) premium, increases the liquidity.
“These days, we’re witnessing a variety of risk factors such as the slowdown of quantitative easing, financial instabilities in emerging Asian economies and the political crisis in Syria,” the ministry commented, continuing, “Under the circumstances, the successful issuing of the bond has reconfirmed how much trust global investors have in the Korean economy.”