HF to Issue Up to 800 Million Euros in Covered Bonds This Month

Securing Policy Mortgage Funds
Issuance Projected at Approximately 1.3 Trillion Won
Planned Structure with 3- to 5-Year Maturities

Korea Housing Finance Corporation (HF) is set to issue euro-denominated covered bonds worth up to 800 million euros (approximately 1.3 trillion won) in August. The purpose behind the issuance is to secure funds for providing policy mortgages such as the Bogeumjari Loan and to obtain repayment capital for overseas bonds maturing soon.

According to the financial industry on August 12, HF recently drafted a plan to issue euro-denominated covered bonds. The corporation intends to issue covered bonds worth up to 800 million euros during this month, with maturities ranging from three to five years. The interest rate structure will be determined by taking into account market conditions, investor preference, and the volume of annual refinancing needs, and will be fixed or floating. The expected credit ratings are 'Aaa' from Moody's and 'AAA' from Standard & Poor's (S&P), which are the highest available ratings.

Covered bonds are debt securities issued by financial institutions, backed by high-quality assets such as mortgage loans. If the issuing entity becomes insolvent, investors have preferential claim over the collateral assets, and for any outstanding amount not covered by the collateral, investors may claim compensation from the issuer’s other assets.

This is a “dual recourse” structure, where the issuer’s repayment obligation and preferential claim over the collateral assets are both secured. As a result, covered bonds are considered a more stable funding source for investors compared to mortgage-backed securities (MBS) or asset-backed securities (ABS), which are mainly repaid from the cash flow of the underlying assets.

The reason HF is seeking the euro covered bond market is due to the lower funding costs compared to the domestic market. According to HF estimates, the funding cost of euro-denominated covered bonds, converted into won, is lower than that of domestic won-denominated MBS. As of July 30, the expected yield for five-year euro-denominated covered bonds is 3.059% (the euro base rate) plus a 0.310 percentage point spread, totaling 3.369% annually. When reflecting the currency swap, the estimated funding cost in won is 4.222% per annum, which is lower than the estimated funding cost for won-denominated MBS (4.835%) and the market valuation yield for five-year won-denominated corporate bonds (4.284%).

HF plans to enter into a currency swap to convert the euro proceeds into won in order to mitigate exchange rate risk.

The funds secured from this issuance will likely be used for purchasing policy mortgage underlying assets and for redeeming maturing overseas bonds. Additional objectives include diversifying funding sources, which are currently concentrated in the won-denominated bond market, and continuously expanding the investor base for European covered bonds.

By mid-August, HF will coordinate with relevant ministries and internal departments, conduct reviews at its Risk Management Committee and Management Committee, examine the issuance contract, and obtain credit ratings. Subsequently, starting in late August, the corporation will determine the final coupon rate based on investor demand, execute the currency swap, proceed with the overseas bond issuance, and carry out the acquisition of underlying assets. An HF official stated, "We are proceeding with discussions with the Ministry of Economy and Finance and the required procedures in line with the issuance plan."

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