State-backed lender Korea Housing Finance Corporation (KHFC) has been a pioneer of social bond issuance, and it continues to demonstrate its commitment to sustainable financing with the launching of the first Covid-19 response social covered bond out of Asia and the first outside Europe.
The Reg S/144A five-year offering, which amounted to 500 million euros (US$561.80 million), was priced at 100.35% with a coupon of 0.010% to offer a yield of 0.003%. This was equivalent to a spread of 35 basis points (bp) over mid-swap, or 2bp inside the initial price thought of 37bp.
The pricing is a manifestation of investors’ recognition of KHFC’s credibility in regard to its contribution to realizing social values, such as providing a stable supply of housing finance for low-to-moderate income households, which is especially relevant in the current period of Covid-19-related economic difficulties.
“We expect the issuance of these covered bonds adds to the efforts we are making to benefit households in Korea by providing stable housing finance at a lower cost,” says Jung-Hwan Lee, KHFC’s CEO.
The net proceeds of the bonds will be allocated in line with the KHFC’s social financing framework to provide support and financing to disadvantaged groups in Korea that are vulnerable to the social-economic difficulties linked to the virus outbreak.
An amount equal to the net proceeds of the issuance will be held within KHFC’s treasury-liquidity portfolio and allocated in an appropriate manner to purchasing mortgage loans. This will enable a reduction in the repayment burden for low-to-moderate income households for home purchase and will stabilize and improve the structure of the mortgage loan market.
In tapping the euro bond market yet again for its social covered bonds, Nam Hyuk Kim, general manager of KHFC’s securitization department, tells The Asset that its business is intrinsically social, and this is already well-acknowledged, especially by European investors. “Despite the relatively smaller size of social-specific funds in Europe, compared with green and sustainability funds, we see the volume of social-specific assets under management growing. We expect more demand on social bonds as well as green and sustainability bonds,” he adds.
KHFC announced the deal when the European market opened on June 29 and was able to revise the price guidance from 37bp over mid-swap to 35bp at 11am, London time, amid solid interest from high-quality investors.
The deal attracted an order book of over 590 million euros from 42 accounts. In terms of geographic distribution, 24% of the bonds were sold in Nordic countries, 20% in Benelux, 12% in Germany, 8% each in France and Switzerland, 7% in the UK, 13% in other EMEA (Europe, Middle East and Africa) countries, and 8% in Asia. By type of investors, fund managers accounted for 40% of the paper; central banks, official institutions and pension funds, 33%; banks, 26%; and other investors, 1%. BNP Paribas, DBS, HSBC and ING acted as the joint bookrunners for the transaction.
“Although the market backdrop was not strong enough given the volatility in the equity markets in Europe and the US, investors showed robust demand on KHFC’s new bonds, which led us to successfully achieve our target size with a minimal new issue premium,” Kim says.
KHFC has been receiving sizeable orders from environmental, social and governance (ESG) funds, and it has been proven that the company’s social value is transparently well received by a wide scope of socially responsible investors in Europe. “This is why KHFC has always been issuing euro covered bonds in social format,” Kim points out.
The latest deal paid a higher spread compared with its previous social covered bond priced in January this year. “We saw extreme volatility since March due to concern about the economic downturn from the pandemic,” Kim says. “Credit spread quickly widened and, especially, trading levels for Korean senior unsecured paper rose by about 100bp.”
However, covered bonds have proven their robust stability in terms of pricing, which is mostly derived from their firm dual-recourse structure that limits the extent of widening in times of severe uncertainty in the market.
“While we saw secondaries of covered bonds widened by 20bp at peak, currently the levels are tightening down, and euro covered bonds are trading at between 10bp and 15bp wider versus the pre-Covid-19 period,” says Kim. “The issue spread of KHFC’s new covered bonds reflect this factor – some widening versus the January 2020 trade, but very competitive pricing against other types of bonds, including senior unsecured paper.”
In January this year, KHFC priced a one-billion-euro social covered bond at 100.145% with a coupon of 0.01% and a yield of -0.019%. This was equivalent to a spread of 24bp over mid-swap. This transaction represented the first-ever negative-yielding euro bond issuance from a non-supranational Asian entity, and the first-ever covered bond issued at negative yield in Asia.
Amid the Covid-19 pandemic, Kim believes that the credit markets, which have been demonstrating resiliency, will continue to perform, at least in the near term, unless there is a significant and clear signal of a volatile second wave of the pandemic with a direct impact on the economy.