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(News Focus) Corporate borrowers back to debt market on stabilizing rates, high demand

Focus/Feature 09:42 March 03, 2023

By Park Sang-soo

SEOUL, March 3 (Yonhap) -- Corporate borrowers are flocking to the local debt market to take advantage of stabilizing market rates and strong investor demand, with even low-rated players coming back to raise money.

Since late October last year, corporate borrowers' borrowing costs had been on the rise in tandem with rising market rates sparked by a series of rate hikes by the Bank of Korea (BOK) to tame rising inflation and an increased credit risk in the debt market.

South Korea's central bank raised its key policy rate seven times in a row since April last year to 3.5 percent as it has grappled with runaway inflation.

Late last year, the country's corporate debt market was also hit hard by a credit risk sparked by a resort operator, which has led the financial authorities to inject massive money into the market.

Market players bet the BOK's monetary tightening move would wane down the road, although the central bank chief signaled last week after a rate freeze that further rate hikes may be possible.

Market players speculate that the central bank would not be able to further raise its benchmark rate given an economic slowdown. The BOK recently lowered its growth outlook for this year to 1.6 percent from a 1.7 percent rise predicted three months earlier, while revising down its inflation projection from 3.6 percent to 3.5 percent.

South Korea's economy is estimated to have grown 2.6 percent on-year in 2022, sharply slowing from a 4.1 percent gain the previous year.

Against this backdrop, market rates have stabilized, and current market conditions are very good for corporate borrowers, according to analysts. After sitting on the fence in August, more firms have rushed to the market.

"Even though there are concerns over a slowdown, investors seem to think that a sharp downturn is unlikely," said Lee Hwa-jin, an analyst at Hyundai Motor Securities. "Also, companies are eager to sell more debts as they pushed back debt issuance last year amid heightened credit risks."

Big-name firms and low-rated firms are knocking on the door to the debt market.

Energy-to-telecom SK Group raised some 5 trillion won by selling debts so far this year, with LG, Lotte and CJ also raking in over 1 trillion won each from the local debt market.

The conglomerate's other affiliates, such as SK Energy Co., are also planning to tap the debt market to secure more cash.

Data showed a sharp recovery in the local debt market.

In January, local companies raised 16.89 trillion won (US$12.87 billion) by selling debts, up 52.7 percent or 5.83 trillion won from a month ago.

In particular, nonfinancial companies sold 6.13 trillion won worth of debts in the local market, sharply up 5.06 trillion won over the cited period.

The readings are in stark contrast to last year's overall debt sales. In 2022, a total of 182.6 trillion won worth of corporate debts were sold, down 9.8 percent from a year earlier, due to the BOK's rate hikes and less demand from investors, according to data from the Financial Supervisory Service.

Nonfinancial firms raised 30.37 trillion won by selling debts last year, down 35 percent from a year earlier and marking the first annual decline in seven years.

Sales of low-grade corporate bonds, once shunned by investors over high-rated corporate debts and safer government debts, are also booming.

For one, there was four times more demand for debts to be sold by BBB+-rated Hanjin Corp.

Demand for corporate bonds also has run high from retail investors. According to the Korea Financial Investment Association, retail investors have snatched up a net 1.47 trillion won worth of corporate bonds so far this year, sharply up from 691 billion won a year earlier.

Reflecting this, a fund that invests in low-priced corporate bonds recently topped 1 trillion won for the first time, becoming the largest fund for bond investment.

The bond fund managed by Korea Investment Management Corp. has drawn some 460 billion won, with its net asset value reaching 1.057 trillion won. At the end of last year, the fund's net asset value stood at 595 billion won.

Analysts said retail investors' increased appetite for corporate bonds, including the ones sold by financial firms, reflects their search for high returns amid low deposit rates offered by banks.

Some analysts said high demand for corporate debts may take a breather as Treasury yields are creeping up amid increased uncertainties over the BOK's rate policy.

"Uncertainties over the BOK's rate policy have recently pushed up Treasury yields, which would make corporate bond buying less attractive," Kim Eun-ki, an analyst at Samsung Securities, said.

The yield on benchmark 3-year Treasurys stood at 3.683 percent as of Monday, sharply up from 3.110 percent on Feb. 3, which means that appetite for risky corporate debts may dwindle down the road.


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