Korean Inc. grapple with higher borrowing costs after Fed’s another big step

Fundraising conditions are worsening for South Korean companies after the U.S. Federal Reserve’s fourth consecutive 0.75-point rate hike has widened its gap with the Korean counterpart to 1 percentage point, the biggest in three years, which could lead the Korean central bank to consider a bigger-than-expected rate hike.

The credit spread between the three-year Korean government bond and three-year AA-rated corporate bond rose 25 percent in two weeks to reach 1.458 percentage points on Thursday. The wider the credit spread, the higher yield on corporate bonds and riskier evaluation by market participants.

The Korean financial authorities’ concerted efforts to stabilize the country’s money market have eased concerns somewhat about a credit crunch, but the Fed’s reaffirmation of its stance to maintain the hawkish rate move until next year has restoked concerns about macro condition, said a financial authority official. With higher rates, it is becoming harder for companies to raise funds.

The corporate fundraising market is already under great stress from supply squeeze in the short-term debt market, ranging from commercial paper to asset-backed securities.

“The bond market is unable to entirely rule out the possibility of the Bank of Korea delivering a big interest rate hike of 50 basis points or greater at this year’s last monetary policy meeting this month,” said Min Jee-hee, an analyst at Mirae Asset Securities. “The bond market may turn volatile again when the BOK makes a big step, which could rekindle a credit crunch fear again,” warned Min.

According to the Korea Financial Investment Association, a total of 5.1 trillion won ($3.6 billion) worth of corporate bonds, excluding asset-backed securities, are due to expire this month. And the amount jumps to 45 trillion won when adding those that mature by June next year. On top of this, credit default risk is rising in Korea after the Korea’s mid-sized insurance firms, including Heungkuk Life Insurance, opted to delay redemption of bonds, only days after the announcement of the government’s measures to stabilize the money market rattled by the default crisis caused by a municipal bond tied to Legoland Korea.

The credit default swap (CDS) premium, which refers to premium payment for protection against default in underlying debt instrument, also hit the highest level in five years. The CDS premium on five-year foreign exchange stabilization bond issued by the Korean government reached 74 basis points on Thursday, tripled from 21 basis points marked at the end of 2021 and the highest since Nov. 14, 2017. The CDS premium on Samsung Electronics also tripled over the same period to reach 67.83 basis points on Tuesday.

By Kim Myung-hwan, Cha Chang-hee and Cho Jeehyun