Same Interest Rate
Starting from the second quarter, major companies are showing a preference for bank loans as a means of fundraising over issuing corporate bonds. This trend is emerging as the interest rates for bank loans do not significantly differ from the interest rates for corporate bond issuance. With expectations of declining market interest rates, these companies appear to be using short-term bank loans to manage the transitional period.
According to financial market trends data released by the Bank of Korea on Aug. 14, bank loans to corporate entities have grown by 48.4 trillion won (US$36.28 billion) up until July this year. In the first quarter, from January to March, there was an increase of 19 trillion won, followed by an additional 29.5 trillion won in the second quarter from April to July. Notably, there was a strong demand for bank loans from large corporations. Up to July this year, the balance of bank loans to major companies increased by 20.3 trillion won, a level similar to the growth of 20.4 trillion won during the same period last year. In contrast, the increase in bank loans to small and medium-sized enterprises (SMEs) from January to July, totaling 28.1 trillion won, stands at only half the amount of 51.5 trillion won compared to the same period last year.
On the other hand, corporate bond issuance saw a significant surge in the first quarter but has been declining since the second quarter. Up to July this year, the net issuance of corporate bonds amounted to 4 trillion won. While there was a net issuance of 9.7 trillion won in the first quarter, the period from April to July witnessed a net repayment of 5.7 trillion won.
In a nutshell, bank loans have been on the rise, particularly among large corporations, while the issuance of corporate bonds has been declining starting from the second quarter. Even just earlier this year, companies were actively engaging in corporate bond issuance. The bond market tensions that lingered from the end of last year gradually eased, leading to a lively corporate bond issuance market in the first quarter due to the early-year effect. As the second quarter unfolded, however, companies started feeling the pressure from elevated borrowing costs. Starting in April, there was a shift towards a net repayment pattern in corporate bond issuance. The borrowing costs for corporate bonds based on the 3-year unsecured AA- rating that were initially around the early 4% range on an annual basis have begun to climb significantly since May, reaching the mid-4% range.
It appears that companies are leaning towards short-term bank loans with the anticipation of a downward stabilization in bond interest rates in the future.
In the market, there is a prevailing expectation that bond market interest rates might only stabilize and decrease after the Federal Open Market Committee (FOMC) meeting conducted by the U.S. Federal Reserve in September. As of June, the average weighted interest rate on corporate loans from deposit banks, based on new handling amounts, stood at 5.32 percent annually, with the average weighted rate for loans to large corporations being 5.25 percent. Considering that the period from July to August is traditionally a slower season for corporate bond issuance, it is projected that the demand for fundraising through bank loans will continue during the third quarter rather than rely on corporate bond issuance.