Cruel Times
A massive grading overhaul is expected in May and June in the corporate bonds market. Credit rating agencies are spearheading company credit adjustments, which are expected to be followed by the downward adjustment of businesses sensitive to economic ups and downs, and conglomerates’ affiliate companies with sub-prime credit.
According to the investment banking industry on March 24, Korea Investors Service, a credit rating agency, recently downgraded by three levels the credit ratings of the non-guaranteed bonds of Hyundai Merchant Marine, Hyundai Elevator, and Hyundai Logistics. Their new rating is BB+, a speculative grade. Previously the bonds were at BBB+, or investment grade. The downgrade marks the bonds as inappropriate for investment, and also indicates more downgrades to come in the next few months.
After a move like this, credit rating agencies are anticipated to downgrade A-rated companies as well, which are relatively vulnerable to recession, during the upcoming corporate bond evaluation season in May and June. Every year, a lot of rating adjustments are made on corporate bonds in May and June and on commercial papers (CPs) in November and December. Last year, 56 percent of the total credit rating adjustment cases were made during the period.
The credit rating adjustment is expected to focus on recession-vulnerable industries such as shipping, aviation, and construction. Im Jung-min, a researcher at Woori Investment Securities, said, “During the second quarter, corporate bonds to be matured will increase up to 4.4 trillion won [US$4.1 billion] with issuances of vulnerable company bonds issued heavily concentrated, leading to deepening of polarization.” Another researcher, Kim Eun-ki, said, “After the settlement of accounts in the first quarter, the construction sector will face additional credit rating adjustments, and so will shipping companies in July.”
According to one analysis, even sub-prime affiliates of prime parent companies might not be able to avert a corporate bond rating adjustment. That happened in the aftermath of the incident where KT’s subsidiary KT ENS filed electrically for a court receivership (corporate rehabilitation proceeding). KT ENS set a precedent that even companies that have top prime rated parent companies can have their bonds turn into default bonds in no time.
The corporate bond market responded instantly. Recently, CJ Korea Express (AA-), a CJ Group leading company with a prime rating, made a payment guarantee for the Korea Integrated Freight Terminal that issued corporate bonds worth 50 billion won (US$46.5 million), but their sales failed. “This is the first case of failing to fill the raising amount in the demand forecast of AA-level company bonds since January,” explained Kim Sang-hun, a researcher at Shinhan Investment Corp.
One associate in the securities industry said, “Amid the continued downward performance of vulnerable businesses, credit rating agencies are inclined to review the affiliates’ competitiveness within the group and the prospect of the parent company’s aid. It is most likely that the issuance of corporate bonds will get harder for shipping, aviation, and construction companies, including the affiliated companies of four leading conglomerates such as Samsung and SK.”