Corporate Bonds
Capital market participants are paying keen attention to the Tong Yang Group’s corporate bond and corporate bill (CP) redemption as the conversion risk lingers on, in spite of the provision of private funds by the founder and the company’s decision to dispose of Tong Yang Power.
Some experts are even mentioning the possibility of a significant disaster in October in the corporate bond market. Approximately 436 billion won (US$406.4 million) worth of debentures come to maturity next month in vulnerable sectors like construction, shipbuilding, and shipping. Although the government is providing assistance for the companies in the industries, they are heavily concerned about a labeling effect.
Market is Getting More Stagnant
According to financial industry sources, 4.81 trillion won (US$4.483 billion) and 5.3 trillion won (US$4.94 billion) worth of debentures mature in October this year for Hanwha Investment & Securities and Shinhan Investment Corporation, respectively. The amount is larger than the 4.1 trillion won (US$3.8 billion) and 3.6 trillion won (US$3.4 billion) amounts of the previous month.
The conversion risk triggered by the Tong Yang Group is already putting heavy pressure on the market. Five affiliates of the group have issued debentures and CPs worth 2.3498 trillion won (US$2.1900 billion) in total. Corporate bonds account for 1.9165 trillion won (US$1.7862 billion) of it, and CPs and certificates of deposit (CD) represent 432.4 billion won (US$401.7 million) of it, 624.1 billion won (US$581.7 million) worth of CPs and the like coming to maturity within this year. In particular, the maturity amount for October is no less than 320.9 billion won (US$299.1 million).
Experts are predicting that the issue of debentures from now on will hold the key to the security of liquidity on the part of the Tong Yang Group and the bond market as a whole. Tong Yang Securities, in the meantime, has indefinitely postponed the issue of 65 billion won (US$60 million) in corporate bonds. “If Tong Yang fails at the redemption at maturity, the stagnation in the low-grade corporate bond market will get even worse,” said Hyundai Securities research analyst Shin Eol.
Under the circumstances, many companies are sparing themselves. A total of 12 companies have signed lead management contracts but have yet to carry out demand predictions. They are divided into the AAA grade of NH Financial Holding, Woori Financial Group and POSCO; the AA grade of Heungkuk Life Insurance, SK E&S, and Meritz Capital; the A grade of KDB Life Insurance, Hyundai Dymos, Nexen Tire, Hansol Paper, and Hyosung; and the BBB grade of Tong Yang Cement.
Companies are Concerned over being Labeled
Pessimists mention the deteriorating funding conditions of companies with low credit ratings in the vulnerable sectors as the ground of their negative forecasts. As of the end of August, the total amount of debenture issue amounted to 3.575 trillion won (US$3.321 billion), and 2.8 trillion won (US$2.6 billion) of it, or 78%, was in the AA or higher grade.
The thing is, the other 22% is being shunned by investors. The outstanding rate increased 12.6 percentage points to 31.9% in the wake of the demand prediction for the second week of this month. “Low-credit companies’ prospects are getting bleaker and bleaker these days,” said Lim Jeong-min, researcher at Woori Investment & Securities, adding, “This means that those with a BBB or lower credit rating are likely to face harsher funding conditions.”
eTrade Securities analyst Oh Dong-seok echoed the sentiment by saying, “Not a few conglomerates, including STX, have been losing the trust of the market this year and things could further deteriorate with time.” He explained, “Besides, 47 trillion won worth of bonds come to maturity next year to pose a greater burden.”
Another concern is that the government’s countermeasures are not doing the trick. Up to this moment, only two companies -- Halla Construction and Hyundai Merchant Marine -- have turned in their applications for the measures. The low participation rate is due to a labeling effect. In the case of conversion issue support, the beneficiary has to sign an MOU with its major creditor bank and carry out restructuring through the disposal of its assets and subsidiaries.
“The government is trying to help out low-credit companies facing a liquidity crisis, but the efforts to deal with the bond market divide and instability could backfire, having a negative impact on their financing and credit ratings,” said Kim Ik-sang at HI Investment & Securities.