New on the Eurobond Market: Convertible Bonds from Korea

Article excerpt

NEW YORK -- All of a sudden, equity-linked bonds from South Korean and other borrowers that in the past usually issued only simple, fixed-rate bonds have begun appearing in the Eurobond market.

Market sources say the recent flood of convertible bonds from non-U.S. and non-Japanese borrowers has been caused indirectly by the widening yield differential between the New York bond market and the Eurobond market. The yield differential has made swaps out of Eurodollar bonds and into floating-rate debt less attractive than they were a month ago.

"The dearth of straight bonds lately, and the resultant flood of equity-linked issues, proves what many have been saying all along," said a Eurobond trader in London, "that as many as half of all straight bonds issued are directly swap-related."

The trader noted that despite the strength of both the New York and the Eurobond markets in the second week in November, very few straightforward fixed-rate bonds were issued. Those that did appear, he added, were not very successful.

A $150 million, 10-year bond yielding 10-1/8% at par for Scandinavian Airlines, for example, did not do very well despite the well-known and respected name.

The dearth of straight bonds combined with fairly good interest from retail buyers (individuals buying for their personal accounts) to provide a good environment for the launching of some interesting convertible issues.

Early in November, the South Korean government announced it would begin allowing establishing industries to borrow from world capital markets, but only by issuing bond issues convertible into stock. The authorities effectively restricted the borrowing to the biggest South Korean companies by imposing a $20 million minimum on the issues.

On the heals of this announcement Samsung Electronics Co. followed in the second week in November with the first-ever convertible Eurobond offering from a South Korean company.

The $20 million, 15-year bond was led by Goldman Sachs for Samsung and carried a coupon of 5%. Rumors of the deal before its launch drove Samsung's share prices up sharply, and traders were concerned that the bonds would not do well as a result. But a Eurobond salesman in London said, "The Samsung bonds have been surprisingly popular with retail buyers, and institutional investors have jumped at the opportunity to break into the Korean stock market, too."

Foreigners previously have not been allowed to own stock directly in South Korean companies -- foreign investment was limited to joint investments -- but the government has been forced to seek more funding for its rapidly growing conglomerates and will open the South Korean stock market to foreign investors in 1987. …