Corporate Bonds
The amount of newly-issued corporate bonds stood at approximately 2.6 trillion won in July, and public issue bonds hit the lowest level since the implementation of demand forecast in May 2012. This is attributed to the global interest rate hike, due to concerns over the reduction of quantitative easing and unfavorable conditions in the shipbuilding, shipping, and construction sectors. Also, things are even bleaker for companies with low credit ratings as investors are shunning them.
The amount of issued unguaranteed debentures fell for the third consecutive month; 127 billion won down compared to a month ago and 5.6 trillion won down year-on-year. Also, it is about one-half of the monthly average of 2011 and 2012, and the lowest in three years and six months. The only exception has been May of last year, when the total added up to 2.152 trillion won. The issue amount of public debentures also decreased by approximately 320 billion won and remained at around 900 billion won, the lowest since May last year.
A large number of corporate bonds are failing to be purchased. According to industry sources, the ratio of outstanding bonds is continuing to soar from 4.5% in January to 24.3% in February, 39.9% in April, and 57.3% in June. Although the percentage has gone down to about 40% as of July 25, bonds with low credit ratings are still showing difficulties.
Specifically, the percentage is 2% for those with the AA or higher ratings, 38% for the A-rated ones, and 100% for those with BBB or lower ratings. The value of outstanding bonds (A or higher) was 143 billion won in the demand forecast for the most recent month and 94.2 billion won worth of them have been bought through purchase after issue and subscription.
Investors are refraining from entering the market. According to the Financial Supervisory Service’s demand forecast data, no investor at all has participated in 59 out of the 284 demand predictions which have been underway since October last year. The ratio of zero investor participation by month increased for four months in a row -- 10.3% in February, 12.5% in March, 25% in April, 31% in May, and 38.9% in June. Investors are feeling the burden of corporate bond issue and distribution as interest rate volatility is on the rise in the bond market.
It is likely that the outstanding issues will be re-sold in the market with the bond price lowered; that is, with the rate increased. However, this causes the market to shrink by further raising the bond rate as seen in the recent STX Group scandal, which put not just the vulnerable industries but also the entire corporate bond market into trouble.
Not a few issuers are postponing or canceling the issue of bonds, too. At present, a total of eight such companies have signed their contracts as lead managers but have yet to start demand prediction, including LG Fashion, Lotte Chemical, and Woori Card (AA-rated); and DGB Capital, Dongwon F&B, Hanwha Construction, Lotte Aluminum, and Daewoong Pharmaceutical (A-rated).