Bond Market
The Korea Financial Investment Association announced on March 28 that the South Korean corporate bond market recorded a total transaction of 7.8505 trillion won this month. For reference, the monthly total value was 14.0707 trillion won in March 2016 and 10.7846 trillion won in February this year.
The corporate bond turnover for this month is 3.43% and it dipped below 4% for the first time since October last year. The amount of corporate bonds issued this month is 4.3322 trillion won. It is much smaller than that of the previous month, which amounts to 6.489 trillion won.
Such a rapid decline is because March, when more regular shareholders’ meetings take place than in the other months, has been a low season traditionally and a number of companies issued their bonds in January and February this year in a hurry before an interest rate hike in the United States. In addition, many companies refrained from issuing bonds this month as the announcement of a plan for the restructuring of Daewoo Shipbuilding & Marine Engineering can affect the market.
Experts point out things can get better in the second quarter of this year because a series of high-grade corporate bonds are standing by. For example, demand forecasting for those of SK Materials, which has a credit rating of A+, is scheduled for March 31 and it is slated to be followed by LG CNS (AA-) and Shinsegae (AA0). Investors have flocked to such high-quality bonds since last year. According to the Woori Finance Research Institute, bonds with a rating of AA or higher reached a net issue of 3.4 trillion won in 2016 whereas those with a rating of A and up to BBB faced a net redemption of 2.5 trillion won and 2.1 trillion won, respectively. This polarization in the primary market is being witnessed in the secondary market as well. At present, trading of corporate bonds with a rating of at least AA accounts for 68% of the total.
Another risk factor is pension funds’ withdrawal from the market following their loss of trust in it. “The amount of issue is unlikely to increase in the second quarter since a large number of bonds were already issued early this year,” said research analyst Kim Sang-man at Hana Financial Investment. He went on to say, “Once the restructuring of Daewoo Shipbuilding & Marine Engineering is almost completed in June, the minimum grade of high-quality corporate bonds will be raised, and then companies with lower credit ratings are likely to have a harder time financing themselves.”