Woori Bank’s Tier 2 offering, the
first Korean Basel III-compliant bond, has set an important
benchmark for Asia’s growing regulatory capital
The bond was the first 10-year bullet Basel
III-compliant bond sold from Asia ex-Japan into the
international markets. It had a coupon of 4.5% and was issued
under Regulation S and Rule 144A.
The deal has been expected for some time, following
Korea’s Financial Services Commission (FSC)
unexpectedly delaying its banks’ implementation of
Basel III from January 1 2013 to December 1 2013 to give the
country’s institutions longer to prepare.
Banks responded by selling cheaper Basel
II-compliant bonds throughout the year. But questions remained
over Korea’s implementation of the write-down
requirement. It is a rare Asian jurisdiction with a statutory
point of non-viability (PONV). Most have retained discretion
over the PONV.
Woori’s offering has clarified
Korea’s regime, clearing a path for other banks
considering Basel III bonds.
"Now the specific terms have been worked out with
the Korean regulators in connection with Woori’s
Tier 2 offering, I think that Korean banks will feel
comfortable using a similar structure for Tier 2 offerings in
the international capital markets," said Yong Guk Lee, a
Seoul-based partner at Cleary Gottlieb Steen &
- Woori’s $1 billion
Tier 2 issuance is the first Basel III-compliant offering
- The offering
clarified Korea’s Basel III regulatory capital
regime, including its statutory point of
- More deals are
expected from Korean banks if pricing
The $1 billion deal launched on April 24, and was
rated Baa3 by Moody’s.
But the notes required in-depth discussions with
Korean regulatory authorities. This was because the process of
incorporating Basel III’s provisions into the
relevant Korean banking regulations had not been fully
completed, said Sang Jin Ahn, Chung Hoon Ahn and Hoonsup Shin,
attorneys at Kim & Chang, in a written response.
The Woori Tier 2 notes also had to meet
Korea’s regulations for Basel III Tier 2
securities. Determining their compliance with both
Korea’s existing regulations and Basel III
requirements required extensive discussions with Korean
regulatory authorities, added the Kim & Chang lawyers.
Korea’s statutory write-down mechanism
differs from most other Asian jurisdictions where regulators
prefer discretionary write-downs.
According to an assessment by Fitch Ratings, bonds will be
written off if the bank is insolvent as defined in Article 2 of
Korea’s Act on Structural Improvement of the
Financial Industry or receives a management improvement order
under Article 36 of its Regulations on Supervision of Banking
The write-down’s link to legislation
reduces the uncertainty about PONVs that is normally inherent
in purely contractual non-viability securities, said
Moody’s in its ratings rationale.
And there is no uncertainty over, if a write-down
is needed, Korean Tier 2 bonds will be fully written off. Lee
observed that Korea’s regulations are slightly
different because they don’t provide for partial
write-downs – a full write-down of Tier 2 securities
is required upon a non-viability event.
Fitch predicted that Korean banks will sell an
increased amount of Basel III securities in the next 18 months
to support asset growth and offset the amortization of legacy
regulatory capital securities.
Lee agreed that Korean banks are interested in
issuing Tier 2 bonds. "Although their capital positions are
generally quite strong, Woori’s bonds saw good
demand and other issuers will look to take advantage of that as
well," he said.
New Basel III-compliant products may soon become
available to Korean banks. The Kim & Chang lawyers noted
that a recent draft of amendments to the Bank Act of Korea
permits the sale of convertible-type notes.
When the amendments go into effect in accordance
with the recent draft, they expected that banks would consider
Tier 2 offerings.
Some market participants were sceptical as to
whether such a flood of deals would occur. Before Basel III
became effective in Korea on December 1 last year, Korean banks
issued approximately $11 billion in subordinated bonds in 2011
and $6 billion in 2012. "It’s unclear whether
there’s an immediate need for Basel III Tier 2
bond offerings," said Yong-Jae Chang, partner at Lee &
Plans for Additional Tier 1 bonds will depend on
pricing. At present funding costs may be an issue, said the Kim
& Chang lawyers. But if those costs are brought down as the
Basel III market develops, many banks may consider AT1 since
the write-off terms for AT1 notes are identical to those of
Tier 2 notes.
Kim & Chang and Cleary Gottlieb Steen &
Hamilton acted for issuer Woori and joint bookrunners Bank of
America Merrill Lynch, Barclays, BNP Paribas, Credit Agricole,
HSBC, JP Morgan and Nomura.
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