Korea corporate borrowing costs jump to 8-year peaks

South Korean companies suffered from surging financing costs as corporate bond yields shot to eight-year highs. Affiliates of major conglomerates with high credit ratings such as Samsung, Lotte and Shinsegae raised funds at interest rates of around 3% per annum, while companies with lower ratings paid borrowing costs of 9%, both the highest since 2014.

Faster-than-expected growth in interest rates may put companies that had been relying on low borrowing costs for fundraising at risk of financial troubles, some analysts said.

An average yield of local corporate bonds with credit ratings of AA or higher more than doubled to about 2.8%, the highest in eight years, on Wednesday from around 1.3% a year earlier, according to credit rating agencies.

Investor sentiment rapidly soured as corporate debts are more vulnerable to liquidity shortage than treasury bonds with market interest rates surging amid deepened concerns over inflations, US monetary policy tightening and expectations of South Korea’s increase in an extra budget.

“Financial institutions deferred investment in healthy companies even since purchases of corporate bonds amid surging interest rates may result in immediate losses,” said an executive at a local brokerage house. “It is inevitable for companies with lower ratings in fragile sectors to face troubles in financing.”

YIELDS MORE THAN DOUBLE

Major conglomerates’ borrowing costs more than doubled from a year earlier. Shinsegae Inc. with a rating of AA on Wednesday issued three-year bonds at 2.96% per annum, the highest rate for debts of the same maturity, since 2012 when it introduced bookbuilding for bond sales. In January 2021, the retail giant sold such corporate bonds at 1.21%.

Hotel Lotte Co. with a rating of AA-, Lotte Group’s intermediate holding company, sold on Monday three-year bonds at 3.25%, more than double of 1.46% a year earlier. It was the first time in eight years for an affiliate of the country’s 10 largest conglomerates to issue bonds at interest rates of higher than 3%. Samsung Securities on Tuesday sold three-year bonds at 2.94%.

Some companies with healthy ratings missed fundraising targets. CJ Freshway Corp. with a rating of A, CJ Group’s food service company, and LS Cable & System Ltd. with a rating of A+, the country’s top wire and cable producer, failed to raise as much money as targeted during bookbuildings last month.

“Institutional investors were reluctant to invest as they tried to avoid losses from soaring interest rates, drying up liquidity for the vulnerable sectors to the COVID-19 and companies with lower ratings,” said another executive at a local brokerage house, who is in charge of corporate bond sales.

“Many companies with ratings of A or lower decided to push ahead of bond sales as the situations are expected to deteriorate further.”

POSTPONE OR WITHDRAW BOND SALE PLANS

Some companies, however, postponed bond sales or dropped issuance plans.

Hyundai Engineering & Construction Co. decided to delay fundraising to after March from this month on rising borrowing costs and chilled investor sentiment on the sector due to a collapse of HDC Hyundai Development Co.’s 39-story apartment building. Hansol Paper Co. withdrew a plan of bond sales to raise 100 billion won ($83.6 million).

Local companies are expected to face more troubles in the financing, corporate bond market participants said. Institutional investors often aggressively buy more corporate bonds than the government papers to seek higher yields around the beginning of a year with fresh budgets. But domestic corporate bonds market this year failed to allure investors.

A yield spread between the three-year corporate bond with a rating of AA- and South Korea’s government bond widened again after narrowing to 0.56 percentage point from 0.6 percentage point briefly last month. That indicated investors preferred treasury bonds.

“Investor sentiment was dampened as companies rushed to issue bonds before interest rates rise further while market interest rates at home and abroad surged,” said Kim Sang-man, an analyst at Hana Financial Investment Co.

LOWER-GRADE BONDS WILL SUFFER MORE

An average interest rate of corporate bonds with ratings of BBB-, the lowest investment grade, was set to top 9% for the first time since June 2014.

The average yield on Wednesday stood at 8.72% annum, up 1.02 percentage points from September last year, according to credit rating agencies. During the period, the three-year treasury bond yield grew 0.88 percentage point.

Those lower-grade corporate bonds are expected to weaken further since the government is scheduled to end liquidity supports for financial institutions next month, analysts said.

The authorities are set to cease measures to ease banks’ liquidity coverage ratio (LCR) and defer loan-to-deposit ratio rules at the end of March, for example. The country also plans to end steps to temporarily ease insurers’ liquidity evaluation standards.

“Most of the financial supports to ease the impact of the COVID-19 are set to end in March, raising the possibility of insolvency in high-risk industries,” said SK Securities analyst Yoon Won-tae, adding investor sentiment on bonds with lower ratings are likely to deteriorate further.

Write to Tae-ho Lee and Eun-Jung Kim at thlee@hankyung.com
Jongwoo Cheon edited this article.