Korea corp. borrowing costs to rise further on Russia risks

South Korean companies are expected to pay more for fundraising as Russia’s invasion of Ukraine has chilled investor sentiment on corporate bonds.

The spread between the three-year South Korean government bond yield and corporate bonds of the same maturity with an AA credit rating stood at 0.6 percentage point, the widest so far this year, on Feb. 28, according to the Korea Financial Investment Association. A wider spread indicated weaker demand for corporate bonds among institutional investors.

Russia’s military attack on Ukraine bolstered concerns among investors over the potential impact of downgrades in credit ratings on Russian banks on European lenders and global companies, said corporate bond market participants in Seoul.

“Distrust among economic players in financial activities will inevitably increase significantly,” said Kim Sang-man, an analyst at Hana Financial Investment Co. “The credit spreads are forecast to expand further,” Kim added, referring to the differential between treasury bonds and corporate debts.

HANWHA GENERAL INSURANCE TO PAY LARGEST COSTS IN 10 YEARS

The increase is expected to further raise corporate financing costs that are already the highest in eight years. An average interest rate of three-year corporate bonds with AA ratings jumped to 2.92% per annum on Feb. 21, the highest since July 2014. In January last year, the average yield was a record low of 1.24%.

Yields of corporate bonds with credit ratings around AA are expected to top 5%, some market participants forecast.

Hanwha General Insurance Co. decided to issue subordinated bonds with an AA- credit rating at 4.9%, the top end of its targeted yields between 4.4-4.9%, to raise 250 billion won ($207.4 million) on March 7. That was the highest interest rate since 2012 when it sold such bonds at 5.8%. Most investors sought yields of 4.8% or higher for the latest bonds during the bookbuilding on Feb. 25.

Credit rating agencies are closely watching the negative impact of increasing volatilities in financial markets on corporate financing.

“That will hit the real economy hard. We plan to keep an eye on the global economic sanctions against Russia and their impact,” said Song Minjun, the head of corporate finance group industry 2 department at Korea Investors Service Inc., an affiliate of Moody’s Investors Service.

Write to Tae-Ho Lee at thlee@hankyung.com
Jongwoo Cheon edited this article.