Korean bond yields untamed despite efforts, spread vs govt bond at 13-year high

[Provided by Maekyung Media Group]

Demand for Korean corporate bonds remains battered at home, pushing the yield spread versus governments bonds of same maturity to the highest levels since the 2008-2009 global financial crisis.

According to the Korea Financial Investment Association, the yield on AA- rated three-year unsecured corporate bond reached 5.361 percent on Friday even as the yield on three-year Korean government bond fell to 3.834 percent, placing the spread between the two yields at 152.7 basis points, the widest since 152 basis points on May 12, 2009.

Short-dated commercial papers yielded over 5 percent last Wednesday, also the highest since January 2009.

The yield spread between bonds of companies rated AA- or above and government bonds had been restricted to 100 basis points for a decade before the Covid-19 pandemic outbreak in 2020. The yield spread between investment grade corporate bonds and government debt widened to 140 basis points around the end of June 2020 and narrowed to 40 basis points in August 2021 before the lifting of the base rate from record low of 0.5 percent.

Yield spread has been stretching amid liquidity squeeze of smaller secondary financial institutions due to large exposure to project financing after the default declare on a public debt backing Legoland Korea project.

“The liquidity troubles from the default of Legoland Korea-tied asset backed commercial paper (ABCP) and heavy debt offering deficit-ridden Korea Electric Power Corp. have quenched the debt market and drove yields of commercial papers and short-term corporate debt,” said Lee Hwa-jin, senior analyst at Hyundai Motor Securities. “Even if the current liquidity shortage eases next year, credit risk would remain high,” Lee added.

Concerns about credit risk remain high over real estate project financing debts and ABCPs backed by securities firms, especially small- and medium-sized players. According to the investment industry, such securities firms-guaranteed debts amount to nearly 20 trillion won ($1.5 billion), and the interest rate of such debts now averages above 10 percent, jumping sharply from around 7 percent following the Legoland Korea crisis.

More than 1 trillion won worth of A2-rated ABCPs guaranteed by local small- and medium-sized securities firms are to expire by the end of this year. If they fail to refinance, they would have to buy the debts with their own funds, and shortage of funds to cover such debts at one firm can be easily rock the entire industry.

As liquidity squeeze grows worse, large securities firms are rushing to issue short-term commercial papers dated 1 year or shorter to secure funds. Currently, there are only four securities firms ? Mirae Asset Securities, Korea Investment & Securities, NH Investment & Securities, and KB Securities - are allowed to issue such short-term debts on own credit. Only the securities firms with assets of 4 trillion won or more are eligible for issuing notes using own credit in Korea.

Balance of issued notes at Korea Investment & Securities reached 12.2 trillion won at the end of October, jumping more than 30 percent from 8.4 trillion won recorded at the end of last year. Mirae Asset Securities recorded 4.4 trillion won, NH Investment & Securities 5.4 trillion won, and KB Securities 6.8 trillion won, all showing sharp rise in balance over the same period.