Woori T2s clarify Korea Basel III

Author: Ashley Lee | Published: 15 May 2014
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Woori Bank’s Tier 2 offering, the first Korean Basel III-compliant bond, has set an important benchmark for Asia’s growing regulatory capital market.

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 & Hamilton.

Key takeways

  • Woori’s $1 billion Tier 2 issuance is the first Basel III-compliant offering from Korea;
  • The offering clarified Korea’s Basel III regulatory capital regime, including its statutory point of non-viability;
  • More deals are expected from Korean banks if pricing improves

The deal

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 Business.

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.

What’s next

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 & Ko.

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.

Tear sheet

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.

Related links

Asia bank capital series: Korea Basel III implementation explained

Asia’s Basel III Tier 2 bond evolution continues

Australian Basel III bonds come of age