Korean Job Discussion Forums

[wylies99]

Woori Skips Bond Repayment Option, Default Risk Soars

http://www.bloomberg.com/apps/news?pid=20601080&sid=aVgCVuj1_JIo&refer=asia#
Feb. 11 (Bloomberg) -- Woori Bank, South Korea�s second- biggest, won�t exercise an option to redeem $400 million of subordinated bonds as it would be more expensive to refinance the debt than to pay penalty interest.

The Seoul-based bank won�t call the notes due to �current adverse market conditions,� it said today in an e-mailed statement, without elaborating. Credit-default swaps on Woori�s subordinated debt jumped 100 basis points to 830 after rising 25 basis points before the announcement, BNP Paribas SA prices show.

�Their decision just destroyed the trust and confidence investors have,� said Arthur Lau, a fund manager in Hong Kong with JF Asset Management Ltd., which oversees $128 billion. �South Korean banks will be struck off from the international capital market for quite some time because of this.�

Deutsche Bank AG in December took bondholders by surprise when it passed up a chance to redeem 1 billion euros ($1.3 billion) of notes, paying a penalty rate instead of refinancing the debt at a higher cost. Spain�s Banco Sabadell SA followed suit for its 300 million euro lower-Tier 2 notes on Feb. 4, roiling investors who expect borrowers to repay callable debt at the first opportunity and who value the securities on that basis.

Woori �is considering various liability management alternatives,� it said in today�s statement. Bank spokesman Kim Ki Rin said he couldn�t comment further, and Kim Jong Geun, executive vice president in charge of the treasury department, couldn�t be reached for comment.

Domino Effect

Woori�s decision �may trigger a domino effect on Asian banks� subordinated debt,� said Brayan Lai, a credit analyst with Calyon in Hong Kong. �The problem is, it doesn�t make sense economically for Woori to call the bonds in the current market conditions, even after taking into account the step-up cost they would need to pay not to exercise the call.�

The bank will need to pay coupon that�s 406.5 basis points more than five-year U.S. government debt after March 13 for the lower Tier-2 notes, data compiled by Bloomberg show. Five-year U.S. Treasuries today yielded 1.79 percent.

The price of its $400 million notes maturing in 2014 plunged to a record low of 79.5 cents on the dollar to give a 12.73 percent yield, compared with 89.5 cents before the announcement, Royal Bank of Scotland Group Plc data show.

Rival Shinhan Bank�s $200 million of 4.5 percent subordinated notes fell to a record 80 cents on the dollar, yielding 9.8 percent compared with 7.9 percent yesterday, RBS prices show.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

A basis point, or 0.01 percentage point, is worth $1,000 on a swap protecting $10 million of debt.

To contact the reporters on this story: Bomi Lim in Seoul at [email protected]; Patricia Kuo in Hong Kong at [email protected].

Last Updated: February 11, 2009 05:52 EST

[wylies99]