To Avert a Liquidity Crisis
An increasing number of major corporations are issuing corporate bonds. They are borrowing money for business operation as well as loan repayment purposes in order to be prepared for a liquidity crisis.
This month, Kia Motors, Lotte Chilsung Beverage and Lotte Food issued 600 billion won, 300 billion won and 100 billion won of corporate bonds, respectively. In addition, GS (200 billion won), SK Energy (550 billion won), Hotel Shilla (350 billion won) and Lotte Holdings (110 billion won) are planning to follow suit before the end of this month. In the first quarter of this year, the total corporate bond issuance was 15.9 trillion won, down 11.7 percent from a year ago.
Kia Motors’ corporate bonds issued this month are divided into 250 billion won for loan repayment and the rest for business operation. SK Energy is going to spend 250 billion won for business operation. Meanwhile, GS is planning to use the corporate bonds and 100 billion won in cash on hand for loan repayment.
Institutional investors’ preference for high-grade corporate bonds in the market where the bond market stabilization fund is in operation is another factor of those corporations’ liquidity enhancement efforts. From March 1 to April 22, a total of 266 ordinary corporate bonds were issued, down 19.8 percent from a year earlier. Given that corporate bond repayment is frequent in April and May, the figures indicate that some companies are currently incapable of repaying their financial obligations by issuing corporate bonds. The bond market stabilization fund, which was activated on April 6, is purchasing nothing but major corporations’ bonds for repayment purposes, adding to the dependence on corporate bonds.
At the same time, the cash crunch caused by the COVID-19 pandemic is leading to more issuance of short-term commercial papers and convertible bonds with relatively higher yields. For example, Hyundai Rotem issued 240 billion won of convertible bonds atypically as a subsidiary of a conglomerate and SK Innovation, SK Energy, GS Energy and Hyundai Oilbank issued commercial papers in spite of their abundant cash.
It is pointed out that the ongoing trend can be interpreted as large corporations’ rush for cash to take advantage of the stabilization fund’s market intervention. “Enterprises’ best option is cash with economic uncertainties triggered by COVID-19 not disappearing at all,” said a local economist, adding, “With the bond market stabilization fund backing, they are accumulating cash to the maximum extent possible in order to switch to aggressive asset purchase once the coronavirus subsides.”