KHFC set for Asian sustainable covered bond first, DKB debut imminent

Korea Housing Finance Corporation (KHFC) will next week begin marketing an inaugural social covered bondthe proceeds of which will be used to support affordable housingwhich will be the first sustainable covered bond from Asia. Deutsche Kreditbank is meanwhile set to sell a social debut tomorrow (Tuesday).

KHFC announced this (Monday) morning that is has mandated BNP Paribas, DBS, ING and SG for the social covered bond transaction, which will be 144A, denominated in US dollars or euros, and is expected to have a tenor of five years. The deal will follow investor meetings in Asia, Europe and the US beginning next Monday (1 October).

The deal will be the first sustainable (i.e. social or green) covered bond issue from Asia. Bank of China issued what it claimed to be a green covered bond in November 2016, but market participants – without criticising its green credentials – did not recognise it as a true covered bond.

KHFC’s new deal will be the inaugural issue off a social covered bond framework newly established by the state-owned issuer.

“Under its mission to contribute to the welfare of the Korean population and the development of the Korean economy by facilitating a stable and long term supply of housing finance in Korea, KHFC plans to issue multiple social covered bonds under this social bond framework,” says the issuer.

KHFC says that, following market best practices, it aspires to fully comply with the ICMA Social Bond Principles 2018.

The proceeds of the social covered bonds will be used exclusively to purchase pools of KHFC mortgage loans, originated by partner banks in South Korea, that support affordable housing.

“All KHFC mortgage loans are carefully designed in terms of eligibility criteria, to ensure that each mortgage product serves the intended social objectives that are in line with the government’s housing welfare policy,” says the issuer

“KHFC mortgage loans are intended to reduce the repayment burden of borrowers by offering long term fixed rate amortized loan products, when compared with many other types of mortgage loan products available in Korea.”

Proceeds will finance three already existing KHFC mortgage products. These include the Bogeumjari Loan, which is designed to enable moderate to low income households to own their residential house with an affordable mortgage through stable debt payment, and the Didimdol Loan, which aims to support low income families who do not own a property to purchase a home.

Proceeds will also finance KHFC’s Conforming Loan, a product introduced to increase the share of long term fixed rate amortized mortgage loans, which are deemed less risky for households in a rising interest rate environment, and help households manage their mortgage payment burden in line with a three year plan launched by the Korean Government.

Sustainalytics has provided a second party opinion on KHFC’s social covered bond framework, confirming that the framework is “credible and impactful” and is aligned with the four core components of ICMA’s Social Bond Principles 2018.

Moody’s assigned a provisional Aa1 rating to KHFC’s social covered bond today. The rating agency noted that at the closing of the deal, KHFC is expected to acquire the initial cover pool from KEB Hana Bank and Kookmin Bank.

If the deal is denominated in euros, it will be KHFC’s first covered bond in the currency. All of KHFC’s benchmark covered bonds to date have been denominated in US dollars, but an official at the issuer said last year that it was looking at euro issuance in order to expand its investor base.

KHFC’s covered bonds are structured under legislation specific to the state-owned issuer, although South Korea also has generic covered bond legislation.

Deutsche Kreditbank announced a mandate this afternoon for a EUR500m no-grow 10 year debut social public sector covered bond, which is expected to be launched tomorrow. The German issuer and leads ABN Amro, BayernLB, Commerzbank, Crédit Agricole and DZ completed a European roadshow marketing the deal today.

The deal will be Deutsche Kreditbank’s first benchmark covered bond since September 2015.

Syndicate bankers at the leads saw Deutsche Kreditbank March 2027s at minus 8bp, mid, pre-announcement. They also cited as comparables 2027-2028 paper from compatriots BayernLB, DZ Hyp, Helaba and MünchenerHyp trading from minus 14bp to minus 11bp.

ABN AMRO