Korea Inc.' struggle for bond issuance deepens amid rising rates

South Korea’s corporate bond market is cooling down fast as demand for company debts falls amid zooming interest rates and growing recession fears, stoking concerns that some small companies may be forced to close down their businesses due to financing trouble.

According to Korea Financial Investment Association on Tuesday, the credit spread between government and three-year AA- bonds has widened to 1.166 percentage points, the highest level since 1.12 percentage points 12 years ago. The wider the credit spread, the higher yield on corporate bonds and riskier evaluation by market participants.

“A 1.166 percentage point (credit spread) is the highest level since 2010,” said Kim Sang-hoon, a researcher at Shinhan Investment Corp. “The European debt crisis emerged in 2010, followed by the downgrade in U.S.’s credit rating, which increased the risk of corporate bankruptcy in shipbuilding and constructions sectors.”

The current credit spread reflects the similar risk level, Kim added.

The wider credit spread is largely attributed to continued rate hikes by the Bank of Korea. The Korean central bank this year raised the rate by a historic 50 basis points twice to put the base rate at a 10-year high, making it harder for companies to sell debts.

With the higher risk level, coupon rates of corporate bonds topped 5 percent in September and October while even Korean companies with high credit ratings are struggling to secure funds.

Samcheok Blue Power Co. with A+ credit rating had attempted to sell 150 billion won ($105.3 million) in two-year bonds but it only managed to raise 2 billion won. It even offered an annual interest of more than 6 percent, which is 35 basis points higher than the previous day’s 5.76 percent rate.

SK reits also tried to issue 96 billion won in debt but managed to raise only 5 billion won. SK rent-a-car planned to raise 40 billion won worth 1.5-year bonds last week but attracted only 10 billion won.

Concerns are growing that the corporate debt market will remain sluggish until the end of this year, according to market experts.

The fast-cooling bond demand makes companies shun bond sale.

According to Korea Financial Investment Association, corporate bond issues reached 1.2 trillion won this month as of Oct. 18, sharply down from 8.8 trillion won in January and February.

In a high interest rate environment, high-graded companies have also shifted away from the bond market to bank loans. The annual interest rate of three-year AA- bonds, in fact, jumped to 5.4 percent from the 2 percent range earlier this year.

The struggle for small and mid-size enterprises with weaker financing capability is even bigger.

To revive bond demand, the Korean government is seeking to issue 30-year bond futures.

The governing People Power Party has asked the financial authority to purchase up to 10 trillion won in corporate bonds and commercial papers, 2 trillion won more than the current level, in a preemptive move to secure safety valve for companies.

The Ministry of Economy and Finance on Tuesday announced to create a taskforce next month to introduce 30-year bond futures in 2024.

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]