Korean firms returning to bond market as investor sentiment improves

KEPCO [Photo by Lee Chung-woo]

The coupon rate on bonds issued by state utility Korea Electric Power Corp. (KEPCO), which has been reported as a culprit of the local money market crunch, fell to the low 4 percent range in the last two months, a signal that the government’s market stabilization measures is helping to improve investor sentiment.

Earlier, the government said it will cut the volume of new treasury, municipal and KEPCO bonds while tuning the timing of issuance and introducing tax benefits for bond investors. The measures came after market unrest caused by Gangwon Province’s debt default linked to a Legoland theme park project, which pushed up coupon rates on KEPCO bonds to nearly 6 percent in late October.

According to sources on Thursday, KEPCO’s latest bond sale was closed with a coupon rate at 4.15 percent on 2-year maturity bonds worth 300 billion won ($233.7 million) and at 4.45 percent on 3-year maturity bonds worth 160 billion won.

Along with the stabilization in bond rates, early KEPCO bond investors are expected to post higher profit. For those who bought them issued at the highest coupon rate of 5.9 percent on Oct. 28, they can reap a profit of 14.6 percent per annum on a yield-to-maturity of 4.64 percent. When interest payment is included, their rate of return will reach 20.5 percent per annum before tax.

In the private sector, companies that delayed bond issuance are rushing again to raise funds amid market improvement. Companies seeking to sell bonds to the public in January next year include POSCO (AA+ rated), LG Uplus Corp. (AA), KT Corp. (AAA), and Shinsegae Inc. (AA). Lotte Engineering & Construction (AA+, guaranteed by Lotte Chemical) and Lotte Confectionery (AA) are reportedly on the list of potential bond sellers that month. UAMCO (AA), a corporate restructuring and bad debt management company, is working to sell bonds worth 70 billion won.

However, the construction industry and A-graded companies are still facing difficulties in raising funds. Local credit rating agencies recently downgraded their credit rating outlook for Lotte Construction (A+) and Taeyoung Construction (A) from ‘stable’ to ‘negative’.