Korean companies are reportedly planning to issue about 15 trillion won (US$12.56 billion) worth of corporate bonds by the end of this year. The corporate bond issue market is likely to pick up after faltering for a while due to a deepening economic slump.
Twelve companies, including SK Securities Co., E1 Corp. and Ssangyong Cement Industrial Co., conducted demand forecasting this month to issue corporate bonds, according to investment banking (IB) industry sources on Sept. 15. The combined size of issuance is more than 1.21 trillion won (US$1.01 billion). A considerable number of sound businesses, such as Daelim Industrial Co., SK Engineering & Construction Co., KT Group and POSCO Engineering & Construction Co., are scheduled to undertake demand forecasting after the Chuseok holiday.
Generally, November and December are the months that see a weaker investor sentiment owing to the effect of the year-end season. Therefore, many experts said there would be a lot of corporate bond issuance next month. With central banks in major countries coming up with expansionary monetary policy one after another, the Monetary Policy Board (MPB) is more likely to cut interest rates in October. Park Jin-young, an analyst at Hyundai Motor Securities Co., said, “From the Federal Open Market Committee (FOMC) in September as the starting point until the MPB next month, the issue market is expected to be buoyant.” In short, firms will scramble to raise funds before the interest rate on bonds goes up with a lower market interest rate.
To be sure, the number of issues until the fourth quarter is small compared to last year. The amount of corporate bonds issued in the fourth quarter last year came to 25.95 trillion won (US$21.73 billion). The figure for corporate bonds to come due at the end of this year stands at 14.60 trillion won (US$12.22 billion), which is lower than 15.13 trillion won (US$12.66 billion) a year earlier. However, coupon rates have fallen. The interest rate on the three-year AA0 rated bond was 1.653 percent on Sept. 11, down 0.648 percentage point from 2.301 percent a year ago.
An official from an IB company said, “Since the interest rate is low, the number of issues for not only refinancing but also raising funds at an easy rate will surge. There is an abundance of liquidity in the market so supply and demand are also in favorable conditions.”
However, the economic slump can lead to the polarization of the financing market. Businesses with a lower credit rating will have difficulties in securing funds, so they will be able to hit the target figure only when they raise the interest rate. In fact, Hanyang Group and Polaris Shipping Co. which completed the demand forecasting last week, had the mixed results, though the two firms had the same BBB+ rating. Hanyang which presented its desired interest rate on two-year products at 5.1 percent to 6.1 percent attracted 27 billion won (US$22.60 billion) of funds for its 20 billion won (US$16.74 billion) worth of bond issues. In contrast, Polaris Shipping showed its desired interest rate on two-year products at 3.5 percent to 4.3 percent and three-year products at 4.3 percent to 5.1 percent and drew only 42 billion won (US$35.16 million) for its 80 billion won (US$66.97 million) bond issues.