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Swiss shockwaves hit Seoul as Kexim shelves issue

[SEOUL] Switzerland's shock decision to scrap its currency peg has spooked Asia's biggest franc-bond market.

Export-Import Bank of Korea, South Korea's largest issuer of offshore bonds, plans to shelve a sale of franc notes after the Swiss National Bank stopped tying the currency to the euro last week.

Other issuers may be discouraged after the cost of swapping francs into US dollars rose to a two-year high, according to Dongbu Securities Co.

South Korean companies have relied on Swiss bonds to raise an average 1.9 billion francs (US$2.2 billion) every year since 2010, attracted by rates at least 180 basis points below US and domestic levels. The franc's 17 per cent surge against the dollar since Jan. 14 should have little impact on their ability to repay 1.8 billion francs of notes coming due this year because borrowers typically hedge using swaps.

"Because of the high volatility in the Swiss currency, its bond markets will probably shrink in the short-term," Yoon Hee Sung, Kexim's director-general of international financing, said in a Jan 16 phone interview.

"We've sold Swiss-franc bonds almost every year and had a plan for this year as well, but with an anticipated increase in swap costs, we're not expecting an issue in the currency for the time being."

The franc soared as much as 41 per cent against the euro and strengthened against all 150 currencies tracked by Bloomberg after the SNB scrapped its three-year-old policy of capping the franc at 1.20 euros on Jan 15, and cut its interest rate to minus 0.75 per cent.

The five-year basis swap between the Swiss and US currencies touched minus 52 basis points on Jan 19, the lowest since January 2013, Bloomberg-compiled data show. A negative rate signals traders are willing to pay a premium to obtain dollar cash flows for francs.

Issuers paying a one per cent coupon for three-year Swiss franc bonds as of Jan 21 would have to pay a rate of 3.4 per cent if the notes were swapped into US dollars, data compiled by Bloomberg show.

Costs may rise further for Korean issuers of franc bonds, which typically swap the proceeds back into dollars, considering interest rates are falling in Switzerland while US rates are tipped to rise, said Moon Hong Cheol, a Seoul-based fixed-income strategist at Dongbu Securities.

"From an issuer perspective, it will likely be unfavourable to sell Swiss bonds due to rising swap costs," he said in a Jan 21 phone interview.

The yield on 10-year Swiss government bonds fell to minus 0.089 per cent on Jan 20 from 1.26 per cent at the start of 2014, Bloomberg-compiled data show. The equivalent US rate was 1.79 per cent Jan 21 with South Korea's at 2.37 per cent.

The Bank of Korea cut its forecast for the nation's gross domestic product growth last week to 3.4 per cent from an earlier projection of 3.9 per cent, after holding the benchmark interest rate at a record low. Recovery isn't occurring fast enough, while external conditions are "not easy" for Korea, Finance Minister Choi Kyung Hwan said in Seoul yesterday.

South Korean financial companies' Swiss franc exposure totalled US$510 million as of Sept 30, equivalent to 0.5 per cent of their total offshore exposure, the Financial Supervisory Service reported this week. Banks borrowed US$3.8 billion from Switzerland as of Nov 30, equal to 3 per cent of their foreign-currency debt.

Corporate and government issuers in the nation sold 1.04 billion Swiss francs of bonds last year, Bloomberg-compiled data show. Hyundai Capital Services Inc, Korea's biggest non-state offshore issuer, accounted for most with 27 per cent of the notes, followed by Korea Expressway Corp and Kexim.

Hyundai Capital's outstanding bonds are fully hedged and it can repay the principal in Korean won, according to the company. As a regular issuer, it's closely monitoring the market after the volatility the SNB's decision triggered.

"We've been trying to tap into new markets to diversify our funding sources in case of geographical issues," the company said in a Jan 20 e-mailed response to questions.

The yield premium over Swiss government debt for Hyundai Capital's 2017 franc bonds has widened 24 basis points since Jan 14, while the spread on Kexim's 2019 notes has increased three basis points.

Of the 12.4 billion francs of outstanding franc bonds in Asia, South Korea accounted for 63 per cent, followed by India at 14 per cent, China at 7 per cent and Japan at 6 per cent, Bloomberg data show. JPMorgan Chase & Co's index of global currency volatility rose to 11.5 per cent following the SNB move, the highest since June 2013.

"There will be no incentive to sell Swiss bonds given current market conditions," said Kexim's Mr Yoon.