Wednesday, February 11, 2009

Woori Credit Risk Soars as Bank Fails to Call $400 Million Tier-2 Notes

South Korea's second-largest bank Woori spooked it debt investors today after announcing it would not exercise a widely anticipated call of its $400 million of Tier-2 sub notes due 2014. As a result the company's CDS spiked 100 points wider to 830, while concurrently the price on its Tier-2 Notes due 2014 dropped from 89.5 to a record low 79.5. Woori is the third bank to not call a Tier-2 note, after German Deutsche Bank in December and Spanish Banco Sabadell on February 4. Bloomberg notes, "Their decision just destroyed the trust and confidence investors have” quoting Arthur Lau, a fund manager in Hong Kong with JF Asset Management.
Woori’s decision “may trigger a domino effect on Asian banks’ subordinated debt,” said Brayan Lai, a credit analyst with Calyon in Hong Kong. “The problem is, it doesn’t make sense economically for Woori to call the bonds in the current market conditions, even after taking into account the step-up cost they would need to pay not to exercise the call.”
Despite this being a balance sheet specific issue relevant only to Woori Bank, regional credit investors, already scared for a variety of reasons, will likely derisk substantially. In an episode of 1997 deja vu, first we saw Russia playing with some default news, and now this. Could it be the start of an emerging market crash reminiscent of the late 90s? Sphere: Related Content
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