IFR Asia Malaysia debt markets report, April 2009

Hyundai Capital Services hit two landmarks when it launched a RM650 million deal on May 20. It became the first Korean corporate issuer in Malaysian ringgit; and it raised the biggest single tranche by a foreigner in that currency.

Getting there was not especially straightforward. True, the three year senior unsecured fixed rate deal was launched amid a flurry of Malaysian interest in foreign issuers: Kexim had already been in the market by that stage, and Industrial Bank of Korea, so the interest of local investors in Korean names was already established. “The deal was based on elevated appetite from onshore investors for both the Hyundai Capital name and for Korean names in ringgit generally,” says Jan Wipplinger at Deutsche Bank, lead manager on the deal.

But that popularity brought a problem too. All Korean issuers, Hyundai included, needed to swap funds out of ringgit – in Hyundai’s case first into dollars, and then on to won. The problem was that by then the wealth of interest from Korean names in Malaysian issues had already had an effect on swap market capacity and pricing. In early April, Hyundai decided the widening basis swaps on both cross-currency trades made the deal uneconomical and delayed it.

As it happened, it was just a question of waiting for the right time, and when the circumstances came right just over a month later (the issue date ended up being May 20), the numbers were not just practical but enticing, and Hyundai upped the deal from a planned RM300 million to RM650 million.

Clearly, the credit was not the problem here, but the economics of the swap. “We did a roadshow to get investors familiar with the name, and then just needed to wait a few weeks to get the right window for the market to open,” Wipplinger says.

Most Korean names up to that time had had at least some state backing and had proven attractive to Malaysian pension funds. Hyundai Capital, lacking that backing, instead appealed to a different group of investors: fund managers, insurers and banks.

That said, there is an element of top-drawer backing in Hyundai Capital: the fact that GE Capital, with a AAA rating, holds a 40% stake in the company. This is believed to have proven attractive for the issuer in many of its offshore deals in recent years, and doubtless didn’t hurt in Malaysia either.

It proved a useful deal for the market, demonstrating there was still life in ringgit for Korean borrowers, and within weeks the issue had been joined by a RM380 million two-tranche bond from Woori Bank. While that might seem to owe more to the IBK and Kexim issues that preceded it, in some ways Woori had more in common with Hyundai: IBK and Kexim are both state-owned government policy banks, Woori and Hyundai represented pure commercial risk. Pricing was reasonably similar between the two as well, with Hyundai Capital’s deal paying 5.5%, and Woori paying 4.68% and 5% on three and seven-year tranches respectively.

Later in the year, Hyundai was back. On September 24, with the US stock markets in utter turmoil, it launched a RM205 million further drawdown off what is a RM2 billion MTN programme. This deal, a private placement of 1.5 year notes, was led by CIMB. This time the deal paid 6%, by which time its three-year notes were trading at around 6%.

Getting any such deal done in those markets was an achievement, and the private placement model appeared to be the only workable method at the time (and arguably still is for a foreign, non-state-backed credit). While the recap was watched closely, bankers were reluctant to read into it any improvement in the market for foreign issuers in ringgit, and so it proved: there would be no other foreign issue in the public markets for the rest of the year.

The notes carried a rating of AA1 from RAM, a rating that would struggle to find an audience in a public deal in today’s markets. But the size of the MTN programme suggests the issuer will be back sooner rather than later when markets allow. Merrill Lynch arranged the swaps on this second deal.

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