Korean corporate bonds suffer from cooling investor sentiment

South Korean corporate bond markets are set to suffer from shrinking liquidity as institutional investors are turning cautious and refraining from making aggressive bets, ahead of the central bank’s looming interest rate hikes.

NCSoft Corp., the country’s leading game developer, decided to issue 240 billion won ($211.9 million) worth of corporate bonds on July 6, half of its initial plan of up to 480 billion won, as demand from institutional investors failed to meet the target, according to the brokerage industry on Thursday.

NCSoft received 380 billion won worth of orders in the bookbuilding on June 28 for the corporate bond sale, its first debt issuance in two years. Back in 2019, it had raised 250 billion won through a bond sale, much higher than the planned 150 billion won, as it was almost four times oversubscribed at 950 billion won.

“The Bank of Korea strongly signaled intention of an interest rate hike within this year, causing turmoil in the bond market. That may have affected the sale,” said a brokerage company’s source.

In addition to NCSoft, HDC Holdings, the holding company of a local developer HDC Hyundai Development, received 102 billion won worth of orders in the bookbuilding on June 28, barely managing to meet a target to sell 80 billion won worth of a corporate bond. It decided to raise 90 billion won through the sale and use the proceeds to repay debts. HDC borrowed $100 million from the Export-Import Bank of Korea, which is due in March 2023, but the company will repay the debt this year, earlier than the maturity at the request of the creditor.

The Bank of Korea is more likely to raise interest rates later this year as the US Federal Reserve is forecast to scale back its massive asset purchase program, prompting expectations that borrowing costs may rise and increasing volatility of bond markets. South Korea’s corporate bond sales in the first half reached a record high as companies rushed to raise funds before interest rate hikes become more visible.

“Companies are unlikely to face big problems immediately as liquidity stays ample in the market,” said an official at an asset management company.

“But corporate bond sales markets will not be free from the impact of strong signals of interest rate increases.,” the source said, indicating companies with relatively low credit ratings, especially below A, may see difficulties in fund raising.

Write to Eun-Jung Kim and Geun-Ho Im at kej@hankyung.com
Jongwoo Cheon edited this article.