Korea’s bond market remains icy due to lingering questions on debt repayment
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The Korean corporate bond market remains in the doldrums despite a series of government rescue actions due to jittery sentiment from Heungkuk Life Insurance Co’s forfeiture in early repayment on perpetual bonds, following a default declare on a municipal debt financing Legoland Korea.
The spread between government bond and corporate bond yields widened to 1.473 percentage points last Friday, according to Korea Financial Investment Association. This is higher than the 1.200 percentage points reached in the wake of the 2008 global financial crisis. The widening in the spread reflects shunning in corporate bonds.
SK Group, South Korea’s second-largest conglomerate, is tapping the commercial paper market because it has become difficult to issue long-term debt.. The group’s holding company SK Inc. is issuing a long-term commercial paper worth 200 billion won on Nov. 10.
It would be the company’s first CP dated more than a year. SK said the CP option is to diversify fundraising scheme, but market analysts speculate that much of tepid demand in longer corporate bonds even from big companies like SK.
SK plans to raise 100 billion in three-year and five-year CPs at coupon rates of 5.629 percent and 5.745 percent, respectively. They will go to refinance CPs due on Nov. 17.
KEPCO is looking to raise funds overseas as the domestic debt market remains uncertain. Korea’s state-run utility firm recently failed to sell its bonds as domestic demand has been lethargic since the Legoland Korea crisis, company official said, adding that it’s considering tapping the overseas market. KEPCO hadn’t failed to sell its debt at home in the last three years.
But overseas conditions are no better. Trade in Korean papers in foreign currency denomination has thinned since Heungkuk Life forfeited on its call option. The price of Heungkuk Life’s perpetual bonds with the $100 face value stood at $72.2 as of Nov. 4, almost 30 percent lower than $99.7 on Nov. 1, a day before it failed to exercise the call option.
Investors were willing to pay nearly $100 for the life insurer’s perpetual bonds because they believed Heungkuk Life bonds would exercise the call option as it had been a practice for issuers to redeem the bonds five years later.
Investors are turning away from long-dated Korean papers as there is no guarantee in earlier redemption.
The Korean government has been encouraging companies to spread out their fundraising plans to avoid overlap as part of efforts to restore the domestic market. The spread-out has helped to restore some demand.
By Kim Myung-hwan and Kyunghee Park
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