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Korea Woos Risk-Seeking Buyers With First Junk Bond in Years

Korea Woos Risk-Seeking Buyers With First Junk Bond in Years

(Bloomberg) -- The first junk bond in years from South Korea may encourage more issuers to go offshore as investors seeking higher returns and portfolio diversification look past geopolitical and trade tensions.

The country’s biggest airline, Korean Air Lines Co., sold an unrated three-year bond at 6 percent last week. The transaction is the first Korean high-yield senior unsecured deal since 2013 and comes as overseas investors are on the hunt for yield following years of low global rates.

“The issuance by Korean Air could open the door for other potential high-yield issuers in Korea,” said Charles Macgregor, head of Asia at Lucror Analytics Pte. in Singapore. “The demand from global investors would be strong given Korea’s large and stable economy.”

It could be a departure for Korean high-yield debt issuers, which have traditionally offered bonds in the domestic market where funding costs have been cheaper. Potential risks such as tensions on the peninsula, more global protectionism and higher U.S. interest rates stack up against solid economic growth -- the central bank raised its 2018 economic growth forecast -- and efforts to reform the nation’s family-run empires known as chaebols.

“For high yield, it’s really name by name, although I think Korea benefits over weaker legal jurisdictions or countries with lower sovereign ratings, such as Indonesia and India,” said Anthony Leung, a senior analyst at Wells Fargo Securities in Hong Kong.

READ: Korean Air Zooming Further Ahead of Asiana in Bond Market 

KAL sold 10 billion yen ($95 million) of Kimchi note guaranteed by Kookmin Bank last week after selling 350 billion won ($328 million) of bonds backed by receivables in January.

Korean Air was able to sell bonds both at home and abroad due to its improved creditworthiness, said Lim Jungmin, credit analyst at NH Investment & Securities Co. in Seoul. The lack of ratings on the bonds seem to show its confidence in securing investor demand without going to credit assessors, she said.

High-yield offerings would probably be unrated in offshore markets, according to Macgregor at Lucror, because Korean issuers would prefer that to being rated speculative grade by global assessors.

Korea Woos Risk-Seeking Buyers With First Junk Bond in Years

High-yield bond investors are eager for more diversity in Asia, where primary issuance has been dominated by Chinese names. Bloomberg-compiled data show that 65.3 percent of sub-investment grade primary issuance in Asia ex-Japan last year was from China, with India, Hong Kong and Indonesia accounting for around 9 percent each.

“Potential Korean high-yield issuers would be of interest to investors on the back of their scarcity,” said Alaa Bushehri, London-based emerging debt portfolio manager at BNP Paribas Asset Management.

“I feel investors are more concerned about the business prospects in the country,” said Leung at Wells Fargo. Investors are watching how the manufacturers and conglomerates are doing globally, in addition to geopolitical tension with the North, which is improving but still volatile, as well as trade relations with China that have worsened recently, he said.

--With assistance from Ven Ram

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net, Carolynn Look in Frankfurt at clook4@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Fergal O'Brien

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