Korean Inc. tighten belts to reduce debt amid growing uncertainty

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South Korean companies are expanding the issuance of low-interest corporate bonds to repay high-interest debt as they prepare for the future amid growing uncertainty.

According to data from the Financial Supervisory Service (FSS) on Monday, listed companies in Korea issued about 41 trillion won ($29.8 billion) in corporate bonds in the first nine months of this year, using about 31 trillion won to repay debt.

Last year, 70 percent of corporate bonds were used to service debt, a share that has increased further in 2024.

Corporate bonds, alongside bank loans, serve as major channels for corporate funding. Companies also raise capital through initial public offerings (IPOs), rights issues, equity-linked bonds such as exchangeable and convertible bonds, and commercial papers (CPs).

Funds raised are typically used for debt repayment, operating expenses, or capital expenditures. In recent years, however, debt repayment has become the dominant use.

The proportion of bonds issued for refinancing rose to 75 percent from 53 percent three years ago, while those issued for capital expenditure fell to 7 percent from 18 percent.

Bonds issued for working capital purposes also fell to 17.6 percent from 27.7 percent over the same period.

Despite raising funds for capital expenditures, companies have left more than half of this capital untouched.

According to FSS data obtained by Representative Yoo Dong-soo of the Democratic Party of Korea, listed companies raised about 7.7 trillion won through bonds, equity-linked securities and rights issues for facility investments last year, but only 3.4 trillion won was used, a low utilization rate of 44 percent.

The rate is significantly lower than the 97 percent for the 8.9 trillion won raised in 2021.

“It is worrisome that companies’ passive investment may lead to a weakening of growth momentum,” Yoo said. “Although improving financial structures is important, if borrowing to repay debt becomes cyclical, the burden will fall on investors.”

Net issuance of corporate bonds has also plummeted, underscoring the focus of companies on reducing debt.

In the first nine months of this year, net corporate bond issuance reached only 736.5 billion won, down sharply from 5.31 trillion won in the same period last year.

Declining interest rates have also contributed to this trend as companies prioritize the repayment of existing debt over new borrowing.

However, refinancing bonds that were originally issued when interest rates were extremely low now brings additional costs.

At the end of October, KB Financial Group issued 400 billion won of corporate bonds, of which 170 billion won was for refinancing.

While the interest rate on debt issued in 2019 and 2020 was around 1.7 percent, the rate on the new issue has risen to between 3.280 percent and 3.304 percent.

“With interest rates higher than in the past, companies appear to be issuing mainly for refinancing rather than new investment,” said Choi Seong-jong, an analyst at NH Investment & Securities. “Amid economic uncertainty, they seem to be focusing on stability rather than growth.”

Meanwhile, large corporations with investment capacity are eyeing overseas.

Industry sources noted that the net issuance of Korean paper bonds for overseas investments has increased for four consecutive years, reaching $18.8 billion this year, already surpassing last year’s total.

The increase in overseas investment is driven by U.S. policies such as the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, which encourage foreign direct investment.