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Corporate bonds

Korean firms scramble for bond sales on further rate hike views

About 10 companies plan bookbuilding next week to raise $1.5 bn or more amid increasing refinancing risks

By Aug 27, 2021 (Gmt+09:00)

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

South Korean companies rushed to issues bonds as the Bank of Korea is expected to raise interest rates further, ramping up financing costs. Some warned of increasing risks on refinancing, given a record high corporate bond issuances in the first half.

About 10 financial institutions and non-financial companies at least planned bookbuilding sessions next week to sell bonds, according to investment banking industry sources on Aug. 27. Those corporates aimed to raise 1.8 trillion won ($1.5 billion) in total with forecast that their bond sales may increase to 2.8 trillion won depending on the bookbuilding results.

POSCO Chemical prepares for issue 120 billion won worth of corporate bonds, considering to raise as much as 200 billion won depending on demand from institutional investors. Kyobo Life Insurance Co., Korea Securities Finance Corp. and Korea Investment Holdings Co. are also lined up for bond sales. They also aimed to raise as much extra fund as possible depenJongding on demand.

The rush came as marker interest rates are predicted to rise further.

REFINANCING RISKS

Local financial institutions and non-financial companies sold a record 127 trillion won in bonds, including 35.6 trillion won from non-financial names, in the first seven months of 2021, up 18.7% from a year earlier. Bond sales had been expected to slow in the second half, but the Bank of Korea’s rate hike spurred more corporates to raise funds in the bond markets as rising interest rates is forecast to increase financing costs.

Given the record issuance, refinancing risks could increase due to higher borrowing costs and lower liquidity.

Investors including pension funds, insurers and asset managers are likely to become pickier since they often suffer losses from higher interest rates, or lower bond prices.

“Differentials between treasury bonds and corporate bonds’ interest rates are widening. Some companies with low credit ratings or bearish outlooks could face difficulties in securing demand,” said a Hana Financial Investment analyst Lee Mi-seon.

CREDIT RISKS

The BOK’s rate hike jacked up corporate credit risks as the tightening added to financial burdens on many industries such as the aviation sector that have been hurt by the spread of the Delta variant of the COVID-19.

Domestic credit rating agencies – Korea Investors Service Inc., an affiliate of Moody’s Investors Service, Korea Ratings Corp. and NICE Investors Service Co. – already started checking the rate increase’s impact on business and financial status of key industries and companies. Credit ratings of companies with large debts are expected to deteriorate as the prolonged COVID-19 kept hurting their business.

They are closely watching the airline industry most as the sector’s financial burdens from higher interest rates are expected to more than others, given their large debts. Korean Air Lines Co.’s borrowing costs were estimated to increase by 57 billion won if the average interest rate rises 1 percentage point per annum. Its fixed-rate loans amounted 7.4 trillion won and floating-rate debts totaled 5.7 trillion won as of end-June. Asiana Airlines was also estimated to pay 34.5 billion won in borrowing costs more with an increase of interest rates by 1 percentage point.

According to Korea Ratings, credit ratings of 19 companies out of 413 corporates fell in the first half due to deteriorating financial stability on the prolonged COVID-19. Refiners, petrochemical producers, cinema operators and automobile parts makers suffered such cuts.

Domestic credit rating agencies expected to see more slashes on higher interest rates. Korea Ratings already assigned negative outlooks on 30 firms, indicating their ratings are likely to fall.

LIQUIDITY PARTY IS OVER

The ample market liquidity amid low interest rates could become a boomerang when borrowing costs rise. Institutional investors had aggressively bought bonds with lower ratings in the period of the ultra-low interest rates to seek higher returns.

But when borrowing costs increases, companies with ratings of AA or above issue bonds at higher interest rates, providing better yields than before. So, investors do not need to look for riskier debts.

“Low-quality companies that had aggressively raised money this year will eventually face great difficulties in refinancing when their bonds mature,” said a brokerage source said. “Unless their business condition quickly improves, liquidity risks will increase and credit ratings will decline.”

Write to Hyun-Il Lee and Eun-Jung Kim at hiuneal@hankyung.com

Jongwoo Cheon edited this article.

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