KHFC social covered bond draws EUR1.5bn euro, SRI bids in Asian first

Korea Housing Finance Corporation issued the first green or social covered bond from Asia and the first Korean euro covered bond on Wednesday, a EUR500m no-grow five year social issue that attracted EUR1.5bn of demand achieved the issuer’s goal of diversifying into European and SRI investors.

Korea Housing Finance Corporation (KHFC) roadshowed its programme earlier this month with a view to issuing a benchmark backed by affordable housing loans in either euros or US dollars. The South Korean state-owned issuer has issued covered bonds in dollars since its debut in 2010, and this week opted for euros for its inaugural social covered bond.

The issuer told Sustainabonds that it was entering the social bond market and the euro market to target SRI and European investors, respectively.

“Our aim is to diversify our investor base by advancing into the European market, the birthplace of the covered bond,” said a KHFC spokesperson. “KHFC is targeting a further expansion of its investor base to take in SRI investors in addition to traditional covered bond investors.

“Also, KHFC is aiming to promote its credit as a public financial institution with a policy role of enhancing social values in Korea. Social covered bonds can offer a great opportunity for us to broadly and clearly highlight our raison d’être and our business, which is to help develop social values in Korea.”

The proceeds of the social covered bonds are used exclusively to purchase pools of KHFC mortgage loans, originated by partner banks in South Korea, that support affordable housing. The spokesperson said three elements were focused on during the roadshow.

“Investors were very keen to understand the quality of the cover pool as well as the credit of the issuer, both of which were strong points for KHFC,” he said. “Investors were quite familiar with the issues facing Korea’s housing market and wanted to clarify KHFC’s role in Korea as a stable housing finance provider.

“And investors were interested in the status of and forecasts for the housing market in Korea and the direction of government policy.

On Tuesday it was announced that KHFC was planning to launch a EUR500m no-grow five year social covered bond via leads BNP Paribas, DBS, ING and SG, and the issuer entered the market the following morning (Wednesday).

Initial price thoughts of the 50bp over mid-swaps area were given, and a syndicate banker at one of the leads said that this was based on investor feedback, which nonetheless included “very different views”. She said that some investors looked at where KHFC covered bonds traded in the dollar market – which indicated fair value of the high 40s or 50bp over mid-swaps when swapped into euros – while others looked at where Korean agencies Korea Development Bank (KDB) and Kexim were trading in euros, which was in the low 30s.

“This explains why there was such a large movement in pricing,” she said.

On the back of some EUR1.5bn of demand, guidance was revised to 40bp-45bp over, will price in range, and with a final EUR1.65bn book holding up at the tight end of guidance, the deal was re-offered at 40bp over.

“We were very glad to see many European accounts getting involved here, which is very positive for the issuer,” said the lead syndicate banker. “One of the key objectives for the issuer was to have new investors involved in their funding.”

Some 93 accounts participated in the transaction, with 90% distributed in EMEA and 10% to Asia. Asset managers and fund managers were allocated 60%, banks 24%, and central banks 16%.

“We once again saw strong demand from traditional covered bond investors, including central banks,” said the KHFC spokesperson. “In addition, we successfully diversified demand by receiving orders from SRI investors as well as expanding our investor base by capturing orders from 16 different European countries.

“We expect to consistently stand as a benchmark issuer for Korean covered bonds, which could further help other banks advance into the covered bond market in the near future.”

He also noted that an increasing number of Korean issuers are entering the green and social bond market.

“Up to 2017, only five issuers had printed green bonds since Kexim issued the first Korean green bond in February 2013,” said the spokesperson. “In 2018, eight Korean issuers tapped the market after they prepared green/social/sustainability frameworks and the deals were all successful.

“We expect this trend to continue going forward, given that more investors are taking into account ESG values in their investment decisions, as proven by the growing size of green/sustainable funds managed by key investors.”

ABN AMRO