S.Korea’s corporate bond market cools amid poor earnings

Investors’ appetite for corporate debts sold by South Korea’s petrochemical, retail and battery companies has waned this month amid grim earnings outlooks throughout this year.

According to the investment banking industry on Friday, Korea’s top hyper supermarket chain operator E-Mart Inc. attracted 35 billion won ($24.4 million) during book-building sessions for the sale of its bonds with a seven-year maturity earlier this week, falling far short of its original plan to sell 50 billion won worth of bonds.

Due to the tepid demand, its debts with a credit rating of AA- are expected to be sold at 30 basis points (bps) above its implied yield suggested by bond rating companies.

Other companies that tapped institutional investors’ demand this month also met with languid demand.

The sale of 100 billion won worth of Hyosung TNC Corp.'s debts with a rating of A+ was undersubscribed during its book building this week. The trench of 60 billion won worth of its debts with a three-year maturity sold 20 billion won less. 

E-Land World Inc., the holding company of Korea’s major retailer E-Land Group, was doomed with institutional investors’ zero bid for 60 billion won worth of its bonds with a 1.5-year maturity.

Machinery and equipment rental firm AJ Networks Co. drew 19 billion won for the sale of 20 billion won worth of its bonds with a three-year maturity during its book-building session earlier last week.

REVERSED DIRECTION WITH HIGHER COUPON RATES

The latest lukewarm demand for corporate bonds is a reversal in fixed-income investors’ sentiment from earlier this year when the Korean corporate bond market got off to a strong start.

Until early this month, companies sold about 20 trillion won worth of debts with low coupon yields.  

However, with signs of a cooldown in the corporate debt market, companies’ borrowing costs are poised to increase while many corporate debt offerings are set to miss their sale targets.

Organic chemical company Kukdo Chemical Co. attracted 50 billion won for its 40 billion won worth of debt sales.

Its bond offerings worth 20 billion won with a two-year maturity drew 30 billion won, while 20 billion won in three-year notes attracted 20 billion won.

The shorter maturity trench is expected to be sold at 5 bps above the implied yield, and the longer one will likely be offered at 10 bps above amid the ongoing slump in the chemical industry.

Lithium-ion battery makers grappling with the industry slowdown have also faced lackluster demand for their bond sales.

EcoPro’s two-year debts with a credit rating of A- drew 15 billion won during book building, barely meeting its target offering worth 15 billion won.

Korea’s No. 1 battery player LG Energy Solution Ltd. sold its debts with a rating of AA at higher coupon rates to attract investors.

The county’s major construction and waste management company SK Ecoplant Co. with a credit rating of A- issued its one-year notes at 3 bps above the implied yield, 1.5-year trench at 14 bps above and offerings with a two-year maturity at 14 bps higher.

As credit rating agencies at home and abroad have downgraded their rating outlooks for Korean petrochemical and battery companies due to the industry slowdown, these companies are expected to struggle to attract funds from debt sales for a while, said Choi Sung-jong, a fixed-income analyst at NH Investment & Securities.

Write to Jeong-Cheol Bae at bjc@hankyung.com

Sookyung Seo edited this article.