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[Exclusive] Corporate bonds

Goldman Sachs to issue its first Arirang bond in three years

By May 12, 2021 (Gmt+09:00)

Goldman Sachs to issue its first Arirang bond in three years 

Goldman Sachs will issue its first Arirang bond since 2018, an action interpreted by the financial circle as the investment bank’s regained confidence in South Korea’s economic fundamentals and the won currency.

An Arirang bond, named after the country’s representative folk song, is a won-denominated bond issued by a foreign entity in Korea.

According to the industry on May 12, the global IB firm will raise 50 billion won ($44.5 million) by issuing the bond on May 18 in a private placement to a Korean institutional investor. The bond has a maturity of 15 years at a yield of 4.3% per annum, a high rate considering its AAA rating.

The banking firm is planning to issue another series of Arirang bonds for other institutional investors, industry sources said.

Goldman Sachs made entry into Korea’s bond market in May 2017, by issuing a 20 billion won ($17.8 million) Arirang bond to diversify its sources of funding. The firm made a quick expansion in the following year by raising a total of 136.6 billion won ($121.5 million) in three different rounds of bond issuance.   

But the market faced a different environment since 2019, with the lowering of interest rates and higher volatility in the Korean currency after the outbreak of the pandemic. Currency stability has a high correlation with the amount of bonds issued in that currency by the foreign entities, as they are exposed to foreign exchange risk from issuing the bonds in a currency different from their home currency.

Accordingly, the analysts are saying that Goldman’s decision to issue the won-denominated bond marks the bank’s restored confidence in Korea’s economy and currency. South Korea’s GDP increased by 1.6% in the first quarter, posting growth in three consecutive quarters.

Both domestic and international bodies are projecting a rosy outlook for the country’s annual GDP growth in 2021, with the IMF estimating 3.6% growth, the Bank of Korea 3.8% and JP Morgan 4.6%. Korea’s currency market has also entered a more stable stage this year.

The country’s capital market is also speculating whether other global firms will resume issuing bonds in Korean won. The total amount of Arirang bonds issued last year and this year adds up to only around 75 billion won ($66.6 million).

The analysts say that if the US continues to see hikes in its Treasury yields, American firms like Goldman Sachs will try to find more attractive opportunities overseas, where they can issue bonds at lower rates. The 10-year US Treasury yield as of May 12 was at 1.631%, up 0.715 percentage points year-to-date.

The Arirang bonds issued by leading global institutions are also in high demand in Korea. The country’s insurance companies are increasing the portion of long-term term bonds in their portfolio prior to the 2023 adoption of the International Financial Reporting Standard issued in 2017 (IFRS 17).

Under IFRS 17, the insurance liabilities are measured at market value, a practice that will numerically increase the insurance companies’ liability figures. To balance out the expected increase in liabilities, the insurers are increasing their investment in long-term bonds, which are accounted as assets.

Experts say that the insurance companies will start paying closer attention to the bond market if Arirang bonds with similar terms, a fifteen-year maturity with a yield of more than 4% per annum, are offered by more global financial institutions.

Meanwhile, the fifteen-year corporate bond issued by LG Electronics Co. on May 4 had a yield of 2.879% per annum.

Write to Jin-seong Kim at jskim1028@hankyung.com

Daniel Cho edited this article.

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