Korea firms reconsider bond sale plans on surging yields

South Korean companies are hesitating to raise funds on surging corporate bond yields. More firms are repaying existing debt and have postponed new bond issues, stoking concerns over an impending widespread decline in corporate investment.

Sales of straight corporate bonds in the two months to March 30 fell 19.9% to 15.8 trillion won ($13.1 billion) from a year earlier, according to the Korea Financial Investment Association. Net issues, excluding repayment of existing corporate bonds at maturity, more than halved to 3.5 trillion won from 8.3 trillion won a year earlier.

That came as bond yields surged to eight-year highs in a short period, forcing more companies to delay issuances, market sources said.

“Corporate finance departments that prepared to sell bonds postponed bond issues, saying they will wait and see,” said an official in charge of investment banking at a major local brokerage.

The average yield of three-year corporate bonds with an AA- credit rating stood at 3.36% as of March 29 in the secondary market, up more than 1 percentage point from the beginning of this year. To issue bonds, companies need to commit an additional 0.3 percentage points to market interest rate yields.

BONDS WORTH 11 TRILLION WON MATURING IN TWO MONTHS

Some market participants expected repayments to exceed bond issuances in the coming months. About 11 trillion won in corporate bonds are scheduled to mature in April and May, according to KIS Pricing Inc., an affiliate of Moody’s. Lotte Chilsung Beverage needs to repay 270 billion won and CJ Logistics has to pay back 210 billion won in April. Lotte Chemical Corp. and Kumho Petrochemical Co. also need to repay 190 billion won and 150 billion won, respectively, next month. In May, SK Hynix Inc. and LG Chem Ltd. must pay back 410 billion won and 400 billion won, respectively.

Most of them have yet to finalize plans for bond sales, except Lotte Chemical, which raised 500 billion won in February through a bond issuance.

Cash-rich companies such as SK Hynix and Kumho Petrochemical may either repay maturing bonds or refinance with short-term bonds, IB industry sources said. Major conglomerates such as Hyundai Motor Group with large investment plans requiring billions of dollars will have to set up new financing strategies, they added.

Companies with poor credit ratings need to manage their financial stability as their funding costs have risen.

“Firms with high debt ratios must consider ways to cut debt, assuming a crisis situation,” said Yoon Jeongsun, a professor of business administration at Kookmin University in Seoul.

Write to Hyun-Il Lee at hiuneal@hankyung.com
Jongwoo Cheon edited this article.