It has been found that no less than 20 trillion won in corporate bonds mature in the second half of this year in Korea, posing a significant challenge to the local corporate financing market, with overall financial markets fluctuating because of concerns over the United States’ quantitative easing exit strategy.
These days, the corporate bond yield rate is rising rapidly due to such concerns, the economic slowdown in China, and the current STX scandal, thus further adding to credit crunch risks. However, financial authorities are continuing with a lukewarm response, with market participants calling upon the government to come up with measures for liquidity expansion.
According to the Financial Supervisory Service, corporate bonds worth a total of 19.855 trillion won will mature in the latter half of 2013, which is larger than the 19.403 trillion won for the first half. The sum is divided into 1,768.1 billion won for July, 3,350.4 billion won for August and 4,310.1 billion won for September. Furthermore, the figure surpasses five trillion won for October.
Under such circumstances, the possibility is increasing that underwriters will refuse to accept corporate bonds, causing financing failures and a decline in the credit ratings of companies. In addition, the yield rates of even investment-grade corporate bonds are increasing nowadays, raising the possibility of financing difficulties.
“Anxiety is spreading fast as adverse conditions continue to appear one after another,” said a research analyst at a local securities company, adding, “More than a few companies could face a credit crunch this year after failing to raise funds.”Another stock market researcher commented, “Even investment-grade companies with a credit rating of A- or higher could be involved with such risks, not to mention the more vulnerable ones in the shipbuilding, shipping and construction sectors.”
As a matter of fact, the coupon rate of bonds recorded an all-time high of 3.40% on June 21 for those with a credit rating of AA- or higher. The figure ended up at 9.05% for those with a rating of BBB- or lower the same day, breaking the 9% mark for the first time since July 28, 2012.
The six companies that signed financial restructuring agreements this year -- Hanjin, STX, Dongbu, Kumho Asiana, Taihan Electric Wire and Sungdong Shipbuilding -- are more likely to have financing troubles down the road. The amount of maturing bonds is especially high for STX Group (580 billion won) and Dongbu Group (422 billion won).
Nevertheless, financial authorities are showing no signs of taking drastic measures, causing many people to worry about the repetition of mistakes made during the 2008 global financial crisis.
“It is true that the situation is not favorable for certain sectors and companies, but we need to look into whether investment demand itself has decreased or investors are now less interested due to the lower-than-expected coupon rate level,” said the financial watchdog. It went on to say, “If the corporate bond spread expands, we can take some measures in the form of bond stabilization funds or preferred underwriting.” The Financial Services Commission added, “We’re currently monitoring the situation in order to get a grasp of it, but various policy measures will be mobilized once signs of a credit crunch are detected.”
However, market experts are claiming that now is the time for the government to step in, stating that it was slow to take a step back in 2008, and thus exacerbating the turmoil. “The government should not take more time, but instead play a trump card for corporate liquidity expansion,” said a bond market analyst at a local brokerage house. He went on, “The Korea Development Bank will have to supply liquidity or allow more funds to be invested in order to buy corporate bonds.”
Another analyst remarked, “It is almost impossible to tide over the current crisis without the government issuing primary collateralized bond obligations or purchasing corporate bonds on a preferential basis,” adding, “The Fed’s exit strategy will tighten the global monetary supply, making local investors refrain from corporate bond investment, and thus authorities will have to take aggressive measures in order to supply liquidity to companies in the shipbuilding, construction and shipping industries.”