Korean firms rush to tap bond market ahead of rate hikes

New corporate bond issuance in South Korea is on course to hit 9.2 trillion won ($8.3 billion) in February of this year, the highest amount issued for a single month in the domestic debt market.

Companies are flooding the debt market as market interest rates have been on an upward trend since late August amid rising inflationary pressure, combined with upcoming government debt sales to fund supplementary budgets.

“The consensus view is that market interest rates should increase from here. Companies are in a rush to borrow money during the first half of this year to not to miss out on the chance of raising capital at record-low rates,” said a leading Korean brokerage company’s debt capital executive.

So far this year, a majority of corporate debt issuers in the domestic market have sold bonds in the 1% range and for larger amounts than had been planned.

The February issuance value included both issued bonds and those scheduled to hit the market later this month, according to data compiled by Market Insight, the capital market news arm of The Korea Economic Daily, on Feb. 23.

The February tally is more than double the January number and is the greatest amount since the domestic debt market introduced the bookbuilding system in April 2012. The number eclipsed the 9 trillion won recorded for February of last year.

Hyundai Motor Co., Naver Corp. and LG Chem Ltd. are among the 33 companies that issued bonds, or are slated for February debt sales.

Next month, 15 companies, including Kia Corp., Coway Co and Hyundai Heavy Industries Co., are set to float new bonds to raise more than 5 trillion won in aggregate. 

Previously, March was a slow month for the primary bond market because companies tended to focus on annual reports and general shareholder meetings.

HEAVILY SUBSCRIBED

Last week, LG Chem raised 1.2 trillion won in a new bond sale, marking the largest won-denominated bond sale by a Korean company. The company doubled its bond issue amount in response to heavy demand.

SK Materials Co., an electronic components maker, decided to double the amount of its bond sale to 300 billion won this month from its earlier plan, in what is set to become its largest-ever debt issuance. The new bonds yielding around 1% were 10 times oversubscribed. SK Materials plans to use the debt proceeds to repay its maturing three-year debt, which the company had sold at an annual rate of 2.827%.

Of the 33 companies that have already issued or are slated to sell new bonds this month, 29 firms decided to boost the size of their debt sales. The February's tally of 9.2 trillion won is a 74% jump from their earlier planned 5.3 trillion won.

In total, their bond sales raked in a combined 30 trillion won during the bookbuilding process, the highest amount for a single month in the domestic corporate debt market.

Yields on three-year corporate bonds rated double A-minus averaged 1.299% on Jan. 29, and have been hovering in the 1.3% range since then. Their spread with the treasury bonds tightened to 30 basis points, after the three-year treasury yield bounced back above 1% earlier this month, for the first time in 10 months.

The spread between double A-minus corporate debt and the treasury bond with a maturity of three years has narrowed to 31.8 basis points, close to the 2019 level when the corporate debt market boomed, compared with 77.7 basis points in June of last year.

Domestic companies are also scurrying to the short-term funding market. The outstanding value of commercial papers came to 64.8 trillion won as of February 22, up 25.6% from early last year.

Meanwhile, the Bank of Korea is widely expected to keep its benchmark interest rate at a record low of 0.50% at a monthly monetary policy meeting on Thursday, but it is expected to bump it up later this year.

Write to Jin-Seong Kim at jskim1028@hankyung.com
Yeonhee Kim edited this article.