Investor demand is flooding into contingent convertible bonds, known as coco bonds, issued by South Korea's financial holding companies. With the supply of five-year corporate bonds shrinking in the credit market, coco bonds — which offer higher yields than ordinary bonds — are emerging as an alternative investment. Analysts expect issuance to continue, as financial holding firms face growing pressure to shore up capital in step with rising risk-weighted assets (RWA).
Woori Financial Group (316140.KS) received 584 billion won ($421 million) in total orders against a 270 billion won offering in a coco bond bookbuilding on the 6th, a subscription ratio of 2.2 to 1, according to investment banking sources on the 10th. The firm raised the final issuance size to 400 billion won. The bonds, set to be issued on the 13th, are perpetual notes with a call option exercisable after five years.
The offering also drew improved demand by lowering the coupon. Woori had set the top of its guidance range at an annual 4.9%, but the final coupon came in 0.11 percentage point lower, at 4.79%. That marks improved sentiment compared with a financial holding company's coco bond bookbuilding in May, when the final coupon landed at the top of the guidance range. Measured by valid orders relative to the offering size, Woori posted the year's highest subscription ratio, ahead of iM Financial Group at 2.1 times, Shinhan Financial Group (055550.KS) at 2.0 times, KB Financial Group (105560.KS) at 1.1 times and Hana Financial Group (086790.KS) at 1.4 times.
The market expects financial holding companies to keep issuing coco bonds for some time. The assessment is that rising RWA — driven by growth in assets such as loans — is increasing the need to raise capital to manage capital ratios. Demand to refinance previously issued coco bonds is another factor supporting new issuance.
The recent decline in long-term credit issuance is also boosting the relative appeal of coco bonds. Coco bonds pay interest like ordinary bonds and count as capital for financial holding companies, but interest payments can be suspended or principal written down if certain conditions arise. Because of these risks, they offer relatively higher yields than ordinary bonds of the same credit rating. With five-year credit supply running short, investors seeking higher interest income are shifting their attention to coco bonds, analysts said.
Some argue the risks specific to coco bonds are unlikely to materialize for now, as major financial holding companies' capital ratios stand well above the thresholds that would trigger a suspension of interest payments or a principal write-down. Choi Sung-jong, an analyst at NH Investment & Securities (005940.KS), said, "Given capital needs from asset growth and refinancing demand, financial holding companies' coco bond supply will continue," adding, "With limited likelihood of events such as suspended interest payments, write-downs or a failure to exercise the first call option, a strategy of buying financial holding companies' coco bonds remains valid, as it can secure both stability and yield at once."
