Rising borrowing costs cause jump in debt sales

Rising overseas borrowing costs prompted Korean companies to double local debt sales this year.

Won-denominated issuance surged 107 percent to 5.2 trillion won ($4.7 billion) since Dec. 31 from the same period of 2014, the best start in three years. Companies including LG Electronics and E-Mart raised the most money ever at record-low costs, helping local issuance outstrip international sales for the first time since 2012.

Speculation that the Bank of Korea will cut its benchmark rate helped trim the premium on AA-rated company debt over sovereign notes to 29 basis points, close to a record 28 basis points reached November. The spread on investment-grade dollar notes in Asia has risen 16 basis points this year, a JPMorgan Chase & Co. index shows. Companies are locking in rates while they can, KB Investment & Securities and Shinhan Investment say.

“Local market conditions are about as good as it gets,” said Jeong Dae-ho, a Seoul-based credit analyst at KB Investment & Securities, the top arranger of local corporate debt. “Companies might be thinking they won’t see current levels again.”

Offshore debt sales dropped 57 percent to $3.2 billion this year, the worst start since 2011. Issuance has suffered as plunging oil and commodity prices, China’s slowdown and the prospect of a showdown between Greece and the European Union muddy the global economic outlook. Monetary policy easing from Frankfurt to Sydney as the United States weighs the case for higher interest rates is pushing up currency volatility.

LG Electronics raised a record 750 billion won selling five-, seven-, 10- and 15-year debentures priced to yield 2.278 percent, 2.507 percent, 2.974 percent and 3.448 percent, respectively, the lowest yet for similar-maturity won paper from the world’s No. 2 television maker. LG increased the size of its offering from 400 billion won after receiving 960 billion won of orders, according to a Jan. 27 regulatory filing.

E-Mart sold 500 billion won of bonds last month, while KT raised 450 billion won. LG Group companies including LG U+ and LG Household & Health Care sold a combined 1.2 trillion won.

“Because government bonds aren’t expected to surge anytime soon, investor demand for corporate bonds will likely remain steady as people look for higher yields,” Han Hee-jin, the Seoul-based chief investment officer of fixed-income at Eastspring Asset Management, which oversees $118 billion globally, said.

The rate on three-year government bonds fell to a record low of 1.937 percent on Feb. 3. The BOK will cut its benchmark seven-day repurchase rate by 25 basis points this quarter to 1.75 percent, according to 12 of 23 economists surveyed last month. The next policy review is on Feb. 17.

Korea’s economy grew 0.4 percent in the three months through December from the previous quarter, the slowest pace in more than two years, the BOK said Jan. 23.

With the government forcing state-owned enterprises to reduce their debt burdens, there’s room for corporate spreads to tighten further, according to Kim Sang-hun, a credit analyst at Shinhan Investment in Seoul.

The spread for three-year AA-rated corporate bonds may tighten as much as 7.6 basis points, while that of A+ rated notes may narrow more than 20 basis points given current sovereign yield leveled, Shinhan’s Kim said. Three-year A+ rated Korean corporate bonds paid a record low 71 basis points more than government bonds on Feb. 2.

Korean state-owned enterprises sold 5.9 trillion won of bonds in the domestic market through Feb. 3, less than the 6.3 trillion won they repaid, Korea Financial Investment Association data show.

Export-Import Bank of Korea sold $2.25 billion of U.S. dollar bonds and 800 million of yuan ($128 million) of debentures last month, while Woori Bank raised $350 million selling U.S. currency securities.

The extra yield on Korean dollar debt has risen 12 basis points since Dec. 31. Price swings of Treasuries, as measured by Bank of America Merrill Lynch’s Move Index, jumped 5.2 percent to 92.74 on Tuesday, the highest since October.

“Companies are likely to opt for the local market, where they can raise money with lower costs and ample demand rather than choose offshore markets under uncertainty,” KB Investment’s Jeong said.
Bloomberg