Report warns of corporate bond risk

With more than 36 trillion won ($33.1 billion) in corporate bonds maturing at the end of the year, a new report warns of a high risk of insolvency unless restructuring moves forward.

The Korea Development Institute (KDI), a state-run think tank, yesterday released a report that predicts construction, shipping and shipbuilding companies, among others, could find it difficult to secure additional funding.

The KDI report noted that since Woongjin Group’s construction arm, Kukdong E&C, filed for a court-led debt restructuring program, investors have shied away from companies or industries with credit ratings below A. That includes companies that hold 16 trillion won of the 36 trillion won due by the end of 2013. About 8.4 trillion won is held by industries considered especially risky - construction, shipping and shipbuilding.

Construction companies hold 4.9 trillion won, about 4 trillion of which has a credit rating below A.

Since 2009, the issuance of corporate bonds has flourished largely because the government has pushed a loose monetary policy to stimulate the economy. As a result, 58.6 trillion won in corporate bonds were issued in 2012, compared to 27.7 trillion won in 2008.

As the bonds near maturity, the construction, shipping and shipbuilding industries have become increasingly dependent on debt, which generates more than 30 percent of construction companies’ capital and half of capital for the shipping industry, according to the report.

The companies and bond market hope the next government takes action, such as tax incentives, to mitigate the issue and reassure investors.

“The problem of many companies is that they are struggling not because of insufficient liquidity, but because of worsening management performance,” said Kang Dong-soo, KDI senior researcher. “The problem should be solved not by injecting additionally liquidity, but through corporate restructuring.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]