Credit card companies shift to short-term bonds amid funding challenges

Continued challenges in funding are driving credit card companies to increase the issuance of short-term card bonds with maturities of less than one year, thereby saving financing costs and preparing for the upcoming bond repayments.

According to the Korea Financial Investment Association on Tuesday, the average interest rate for 3-year corporate bonds issued by the three major credit card companies with a credit rating of AA+—Shinhan Card Co., Samsung Card Co., and KB Kookmin Card Co.—stood at an annual 4.734 percent as of Monday.

The interest rates on credit finance company bonds are on a downward trend after peaking above 6 percent in 2022 following the Lego Land default crisis, until they rebounded in May 2023 following market rate hikes, having been maintained in the 4 percent range since. These4 hikes are more expensive to fund, thus increasing the burden on credit card companies. Against such a backdrop, credit card companies opt for short-term bonds, which enable them to finance with relatively low-interest rates.

According to the securities portal by the Korea Securities Depository (KSD), the issuance of corporate bonds by credit card companies with maturities of less than one year was 750 billion won ($553 million) in September 2023, up by 280 billion won compared to the previous month. This is a significant increase compared to the 36-billion-won bonds issued in January 2023 when the benchmark interest rate was raised.

By individual credit card company, Shinhan Card issued the most bonds in September at 220 billion won, followed by HanaCard Co. at 200 billion won, Hyundai Card Co. at 120 billion won, Lotte Card Co. and KB Kookmin Card each at 80 billion won, and Woori Card Co. at 50 billion won.

Among these companies, Hyundai Card issued short-term bonds with maturities of less than 6 months at 100 billion won, Shinhan Card 60 billion won, Hana Card and Lotte Card each 50 billion won. Up until Tuesday, Lotte Card has already issued an additional 80 billion won, and Shinhan Card an additional 60 billion won, for the month.

The increase in short-term card bond issuance is due to overlapping factors including rising U.S. Treasury yields, the removal of issuance limits for bank bonds, and the resumption of corporate bond issuance by the Korea Electric Power Corp. These factors have made the fundraising situation increasingly challenging. Card companies’ bonds are less favored compared to other secure bonds, thus seeing minimal demand for medium and long-term bonds. High-interest rates also make it difficult for credit card companies to cover the costs associated with these long-term bonds.

As the burden of bond issuance rates continues to grow, credit card companies are focused on repaying bonds as they mature. As of Monday, the total amount of matured bonds from these companies until the end of the year is 16.99 trillion won.