JP Morgan

Few deals deserve the epithet of being described as remarkable, but Hanvit's upper and lower tier 2 debt transaction is undoubtedly one of them. The ten, non-call five deal marked Asia's first international bond offering of the year and at year end, it still stands as its most significant. Indeed Asian bank subordinated debt has become such an integral part of the region's fixed income landscape that it is almost hard to appreciate just how groundbreaking the deal was at the time of its launch in mid-February.

The first ever issue of upper tier 2 debt by a non-investment grade bank globally, the deal also represented only the third instance of publicly issued lower tier 2 debt from the same credit class. Prior to Hanvit, there had been just two $100 million issues by Korea's Cho Hung Bank and Slovakia's Vseobecna Uverova Bank, plus a couple of private placements by Japanese banks.

No issuer before had ever attempted to raise funds in such size, however and few were sure whether enough investors would be prepared to move down the credit curve to support it. Even if they did, many observers thought that the smell of blood might tempt investors to push pricing to levels that Ba2/BB rated Hanvit would be unable to bear.

For the bank itself, a deal was borne out of the necessity of rebuilding capital ratios that had been decimated by the financial crisis. Shut out of the equity markets by a share price trading below par value and the domestic debt markets by high local interest rates and a stunted yield curve, Hanvit believed that the international debt markets offered some slim hope.

JP Morgan's chief skill lay in marketing the deal as leveraged exposure to the sovereign, which owned 75% of the bank. In Hanvit, investors sensed a high yielding instrument that might replicate the previous year's massive spread widening across the Asian credit spectrum. A total of 110 investors consequently bought into the deal, with 10 placing orders above the $30 million.

Following pricing at 612.5bp over Treasuries for the upper tier 2 tranche and 580bp over for the lower tier 2 tranche, a new asset class had been created for emerging market borrowers. Sadly by year-end, the proceeds failed to be enough and the country's second largest commercial bank by assets was told by the FSC that it would be merged into a government holding company alongside Peace Bank, Kwangju Bank and Cheju Bank. Likewise, the hoped for spread contraction failed to emerge, with both tranches trading wider.

Nevertheless, the transaction remains almost universally praised by market observers. "It is hard to understate the true importance of this deal to Asia," one official concluded at launch. "It was a deal which had to work and it had to be seen to work well. This it has done."

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