RAM Ratings reaffirms AAA rating of Korea Development Bank’s debt issue

Published on 24 December 2012

RAM Ratings has reaffirmed the AAA long-term rating of Korea Development Bank’s (“KDB” or “the Bank”) Conventional Medium-Term Note (“MTN”) Programme and Islamic MTN Programme, with a combined limit of RM3.5 billion and a sub-limit of RM1.0 billion for the Conventional MTN Programme; the long-term rating has a stable outlook. KDB is a policy bank wholly owned by the Government of South Korea (“GoK”) through Korea Finance Corporation and KDB Financial Group (“KDBFG”).

The rating reflects the strong government support for KDB, the Bank’s established presence in South Korea’s corporate and investment-banking arenas, as well as its solid capitalisation levels and sound liquidity position. The Bank’s strengths are, however, moderated by its weak asset quality given its policy role in restructuring troubled corporates, including large conglomerates and shipbuilders. At the same time, the Bank is exposed to refinancing risk due to its heavy reliance on wholesale funding, which is susceptible to market sentiment. The Bank’s profit performance is also volatile given that the investment-banking business is subject to the vagaries of the financial markets.

KDB is currently undergoing a government-led privatisation that underscores the GoK’s objective of nurturing the Bank into a competitive global investment bank over the longer term. While the timeline for full privatisation remains fluid at this juncture, the initial sale of the GoK’s shares in KDBFG (“Initial Sale”) has to take place before May 2014, as set out in the KDB Act. At the point of the Initial Sale, the GoK will extend guarantees to KDB’s outstanding foreign-currency debts (including the RM500 million already issued under the Conventional MTN Programme); the guaranteed amount must be within the limit authorised by the National Assembly. Thereafter, new issuances of foreign-currency debts and unissued amounts under the existing foreign-currency debt programmes may or may not benefit from the GoK’s guarantee.

RAM Ratings expects strong government support from the GoK while it remains KDB’s controlling shareholder. The GoK is obligated to maintain the Bank’s solvency through Article 44 of the KDB Act, which stipulates that any deficit in KDB’s legal reserve must be offset by the GoK. We note that if the GoK's shareholding in KDBFG falls below 50%, it will trigger the abolishment of the KDB Act and, consequently, the solvency guarantee. On this note, we opine that the privatisation exercise may be a long-drawn-out affair. Given the Bank’s expertise and established track record in corporate restructuring, however, it still plays an important role in supporting the export-oriented South Korean economy amid the currently challenging operating environment as a result of the global slowdown. We will continue monitoring the developments on the privatisation and reassess the rating of KDB, if necessary. 

Media contact

Gladys Chua

(603) 7628 1049

gladys@ram.com.my