Corporate bond sales shift from investment to debt repayment

(Yonhap)

As uncertainty continues to mount, corporate funding strategies are shifting from investment to defense, with companies increasingly prioritizing refinancing and liquidity buffers over new projects.

With policy directions in major economies including the United States — as well as domestic corporate policy — difficult to predict, volatility in exchange rates and interest-rate paths is reinforcing a conservative stance. Rather than financing capital expenditure or new businesses, firms are using corporate bond issuance to secure long-term funds for debt rollover and liquidity management, raising concerns that already-weak economic momentum could deteriorate further.

According to the Financial Supervisory Service on Wednesday, nonfinancial companies issued roughly 51 trillion won ($34.7 billion) in corporate bonds from January to October this year. Of the total, 81 percent was used to repay existing debt, while only 3 percent was allocated to new investment, underscoring how corporate bonds have become tools for maturity management and liquidity defense rather than growth financing.

Cases in which companies issue bonds worth trillions of won only to channel the proceeds entirely into debt repayment are becoming increasingly common. Korea Zinc, which had previously operated without debt, issued 1.4 trillion won in corporate bonds this year alone. In April, it raised 700 billion won to repay high-interest private bonds taken out last year for a tender offer aimed at defending management control. In October, it issued an additional 700 billion won in bonds to secure repayment funds for trade finance obligations maturing through February next year.

Amid this trend, the corporate bond market is seeing not only expanded refinancing but also a sharp increase in net issuance. This indicates that companies are rolling over maturities while simultaneously raising funds beyond repayment needs to build thicker liquidity buffers. From January to October, net issuance of general corporate bonds totaled 8.72 trillion won, nearly six times the 1.43 trillion won recorded during the same period last year.

Some companies are even stockpiling refinancing funds well ahead of maturity dates. SK innovation issued 600 billion won in corporate bonds in September and disclosed that the entire amount would be used to repay existing borrowings, despite the targeted debt maturing between March and May next year — more than six months away at the time of issuance. In April, the company had also issued 800 billion won in public bonds to preemptively repay borrowings due between June and September.

Woo Seok-jin, a professor of economics at Myongji University, said the current funding behavior reflects efforts by companies to strengthen financial soundness amid economic stress or tightening cycles. “While surveys and indicators sometimes show optimistic outlooks, in reality a contractionary view dominates, creating a disconnect between sentiment and actual economic activity,” he said.

The focus on repaying high-interest debt has also prevented corporate bonds from establishing themselves as long-term funding instruments. Issuance of long-term bonds with maturities exceeding five years has declined steadily since surpassing 6 trillion won in 2021. From January to October this year, long-term bond issuance totaled 1.46 trillion won, nearly half the 2.31 trillion won recorded a year earlier.

Rising funding costs are cited as a key reason corporate bonds are becoming less viable as investment capital. According to the Korea Financial Investment Association, yields on three-year AA-minus rated corporate bonds hovered around 2.0 percent in 2021. They have since risen to around 3.5 percent. HDC refinanced a 200 billion won bond issued in 2021 at an interest rate of 2.915 percent with a new bond issued last month at 3.784 percent.

The macroeconomic environment is also seen as insufficient to support aggressive investment decisions. The Korea Economic Research Institute forecasts South Korea’s economic growth at 1.7 percent next year, below the estimated potential growth rate of 2.0 percent. Mounting financial burdens and the need to manage creditworthiness are further pushing investment down the priority list. According to the KDB Future Strategy Research Institute, the delinquency rate on corporate loans stood at 2.72 percent as of the end of June — about 3.5 times higher than at the end of 2019 before the COVID-19 pandemic.

A chief financial officer at a major conglomerate said weak growth forecasts and heightened uncertainty surrounding exchange rates and labor conditions are forcing companies to focus on strengthening balance sheets. “We do have plans for overseas plant expansion and research and development investment, but execution has been delayed until financial conditions and market demand improve,” the CFO said.

Meanwhile, companies are increasingly turning to equity rather than debt to fund long-term, large-scale investments.

Hanwha Aerospace raised 2.92 trillion won through a rights offering in July, while POSCO Future M carried out a 1.11 trillion won capital increase the same month. Both companies said the funds would be used for new investments. T’way Air also resolved on Dec. 11 to conduct a 191 billion won rights offering, earmarking the proceeds for financial stability and new aircraft acquisitions.

Analysts say a structural shift is taking hold, with corporate bonds used primarily for refinancing and liquidity defense, while long-term and large-scale investments are financed through equity. From January to October, rights offerings by KOSPI-listed companies exceeded 6.2 trillion won, a sharp increase from about 2 trillion won for all of last year.

Industry officials note that equity financing is easier when stock prices are supportive, as it can immediately improve financial ratios and expand investment capacity. However, they also warn that equity-based funding tends to favor large, well-capitalized firms, potentially widening the investment gap between companies.