Korea’s Bond Market
It has been found that the average maturity of newly issued corporate bonds has become shorter with the debenture market polarizing. Institutional investors are refraining from buying five-year or longer-term bonds to cause a drastic decline in the bond issue amount.
The Korea Securities Depository announced on September 9 that the ratio of five-year debentures was 34.81% as of July. The percentage increased from 64.69% to 68.53% between the beginning of this year and June, while that of one to three-year corporate bonds soared from 6.94% to 17.06% during the same period. The ratio of three to five-year bonds almost doubled from 27.69% to 47.01%, too.
Earlier this year, the ratio of long-term debentures had been quite high, because investors had been very willing to purchase long-term bonds for a high rate of return with the low interest rate trend continuing. However, things changed recently and the average maturity has dipped below three years. This can be attributed mainly to STX Pan Ocean’s filing for court receivership in late June this year. Since then, the debenture market has shrunk, and investors have shunned long-term bonds amid widespread uncertainties.
“Short-term debentures have been preferred by major investors like insurers and pension funds since the Woongjin Group’s and STX Pan Ocean’s court receivership,” said a market insider, adding, “Their consensus is that it is too risky to invest in five-year bonds while they are losing sight of the market.”
LG Electronics, which succeeded in demand predictions recently, was supposed to complete the issuance of two-year, five-year, and seven-year public corporate bonds, all worth 100 billion won (US$922 million), back in June. However, the company postponed the issue due to bond market volatility, and halved the amount of the five and seven-year debentures to wrap up the demand prediction with success.
In the meantime, some companies are resorting to financing means other than an initial public offering. For example, CJ Korea Express submitted a securities report two months ago and issued commercial papers with a maturity of three years. In the following month, UAMCO, Daewoo Shipbuilding and Marine Engineering, and KT Rental announced similar reports for 140 billion won (US$129 million, two-year maturity), 400 billion won (US$369 million, three-year) and 100 billion won (US$92 million, three-year) commercial papers (CPs), respectively. Experts are saying that they opted for the issue of long-term CPs to avoid demand prediction.
“The fact that even AA-grade companies have canceled or reduced the issue of long-term bonds reflects how dampened the sentiment of institutional investors is,” said an investment banking industry insider, adding, “At least for now, those with an A or lower grade don’t dare to dream about issuing three-year or longer-term debentures.”