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Corporate Bonds

Korea’s cash-rich firms issue more bonds amid low interest environment

The firms are raising more money from the bond market as the cost of equity has become higher than the cost of debt

By Jul 19, 2021 (Gmt+09:00)

(Source: Getty Images Bank)
(Source: Getty Images Bank)

Some of the most cash-abundant firms across different industries in South Korea are issuing large amounts of bonds to raise even more funds amid a low interest rate environment.

Com2uS Corporation, the game company behind the globally popular Summoners War series, is one such cash-flush firm. On July 27 the company will issue its first-ever corporate bonds since its foundation in 1998 to raise 150 billion won ($131 million). Com2uS boasts net cash of 607.8 billion won ($530.4 million) as of March of this year.

Likewise, another game developer PearlAbyss Corp., issued its first set of bonds in the company’s history on July 13 to raise 147 billion won ($128.3 million). PearlAbyss is the fifth-largest firm listed on the Kosdaq with net cash of 295.4 billion won ($257.8 million).  

The largest game company publicly traded in Korea, NCSoft Corp., also raised 240 billion won ($209 million) on July 6 in the bond market. The company has net cash of 1.7 trillion won ($1.5 billion won).  

Outside the gaming sector, leading auto components maker Hyundai Mobis Co., which has net cash of 5.7 trillion won ($4.9 billion), raised 350 billion won ($305 million) on July 9 for its first public bond market issue in 11 years.

Another major manufacturing company, Hyundai Motor Co., issued its first set of green bonds in February to raise 300 billion won ($262 million). The largest automaker in Korea has net cash of 12.1 trillion won ($10.6 billion).

THE RATIONALE BEHIND BOND ISSUES
 
Market analysts note that the single largest factor driving these cash-rich firms to secure extra funds from the bond market is the current ultra-low interest rate environment.

Specifically, the yield rate of Korea’s 3-year treasury bonds, which had been around 4-6% per annum prior to the global financial crisis in 2008, hovered around only 1-2% after the crisis.

The rate eventually dropped to its lowest point in history at 0.795% in August 2020, driven by the Bank of Korea’s policy decision to lower the interest rate and inject more money into the economy.

With the 3-year treasury bond’s yield rate recently making a partial rebound to 1.3-1.4% per annum, analysts project that the country’s major firms will issue more bonds again before the rate recovers to previous levels.

“The companies, even those with a lot of cash in their pockets, are thinking that they need to issue more bonds right now, before the yield rate becomes higher,” said an investment banking analyst.

The market analysts further explained that the cost of equity such as dividends paid to the shareholders is now high, compared to the cost of debt such as the interest from borrowing money through loans and bonds.  

They note that the cash owned by the companies is “not free,” but instead comes from the investments of shareholders who ask for a higher rate of return than bondholders, as the risk of holding shares is higher than that of holding bonds.

KB Securities Co. analyzed Hyundai Mobis’ cost of equity to be at 9.9% per annum, a figure much higher than its cost of debt at around 1-2%.

Other market watchers said that these firms are trying to secure as much funds as possible for full-scale investments in future business growth areas.

For instance, the country’s largest tech company Naver Corp., which had net cash of 2 trillion won ($1.75 billion) a year ago, now holds 730 billion won ($636 million) due to a series of M&As across different sectors. Naver this year has issued 700 billion won ($611 million) worth of won-denominated bonds and also raised another $800 million won in dollar-denominated bonds.

Likewise, Hyundai Motor will be using its funds raised in February to invest in future mobility sectors including electric and hydrogen fuel cell vehicles. Hyundai Mobis will also use all 350 billion won ($305 million) raised this month to transform itself into a key future mobility player.

Write to Geun-ho Im at eigen@hankyung.com

Daniel Cho edited this article.

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