Korean corporate debt market still under squeeze despite aid actions

Despite multiple aid measures including state-led purchase program, Korean Inc. still struggles to raise debt for refinancing and operation as public enterprises have little choise but to defy government order on restraint in debt issues to sustain operation against ballooning losses.

At least 4 trillion won ($2.8 billion) worth new offering is expected from public issuers this month, widening the spread between government and corporate bonds regardless of various state’s measures to bolster demand for corporate bonds. The spread was 141.8 basis points at the end of trading Tuesday, according to the Korea Financial Investment Association.

Bonds of liqudity risk such as housing builders have shown extraordinary movements.

On Tuesday, Hanshin Engineering & Construction’s bond dated March 3, 2023 trading at around 3 percentage points (300 bp) above the market interest rate widened the gap to as wide as 59 percentage points to yield 65 percent. The yield returned to normal level on Wednesday.

An unnamed official in the bond market said it was exceptionally unusual for a debt with maturiy not that long to show such volatility.

An official at Hanshin Engineering said the company was still studying the reason behind the extraordinary movement.

The continued pipeline of quasi-government bonds offering generaous returns on top of security also has been quenching demand for corporate bonds.

In November alone, at least 4 trillion won worth of new offerings are due from state-owned companies, including about 2 trillion won from KEPCO. The electricity provider is offering 400 billion won worth on Nov. 3 on the back of issues in 700 billion won on Oct. 28 and Nov. 1 at coupon rate of around 6 percent.

An official at a security firm said that KEPCO has been offering 2 trillion won to 2.5 trillion won new debt almost every month recently. The power monopoly is looking at annual losses of around 40 trillion won as it had been constrained in raising electricity charges despite jump in fuel import and producting cost.

Korea SMEs and Startups Agency and Korea Housing Finance Corp. are also planning to raise 500 billion won from debt sales each this month. Other state-owned companies such as Korea District Heating Corp. and Korea Student Aid Foundation are waiting to tap the market.

Market watchers think it could take time before the stabilization measures kick in and reach the corporate bond segment.

A researcher at Samsung Securities Co. said that that government bonds have stabilized and the short-term debt situation is showing some signs of improvement. But given the grim business outlook and rising interest rate envrionment, demand for corporate bonds won‘t likely easily rebound.

By Kim Myung-hwan, Kang Bong-jin, Ryu Young-wook, Cha Chang-hee and Kyunghee Park