Corporate bond sales starting to show some life

Company bond sales in Korea rose to the most in seven weeks as concerns over economic growth diminished and borrowing costs moderated.

KB Financial Group led offerings to 700 billion won ($630 million), the most since the five days ending June 21. That compares with 560 billion won of sales the previous two weeks combined and average weekly issuance this year of 572 billion won.

The Bank of Korea held its benchmark interest rate steady Thursday as signs of stronger growth in the United States back its view that Asia’s fourth-biggest economy will gather momentum. An interest-rate cut three months ago and an extra government budget are helping to fuel growth, which in 2014 is forecast by the central bank to be the fastest since 2010.

“Issuance is picking up and this trend is expected to last well into September,” said Lee Jong-myung, a credit analyst at Hanwha Investment and Securities. “Concern over economic growth and uncertainty in the market is easing, which will lead to companies increasing borrowings.”

Under President Park Geun-hye, who took office in February, Korea unveiled a 17.3 trillion won supplementary budget in April to support exporters pressured by a weaker Japanese currency and boost growth by creating 40,000 jobs.

Potential risks include a sluggish property market, a slowdown in China, Korea’s biggest trading partner, and the possibility of volatile global capital flows when the U.S. Federal Reserve does scale back monetary easing.

Korea’s central bank is counting on improving domestic demand and resilient exports to achieve forecasts for expansion of 2.8 percent this year and 4 percent next year. Gov. Kim Choong-soo and his board left the seven-day repurchase rate at 2.5 percent Thursday.

“A greater number of bonds are scheduled to mature in the coming months versus June and July so that’s also going to lead to more issuance,” said Park Cheong-ho, a credit analyst at Dongbu Securities.

KB Financial sold 350 billion won of notes in a three-part sale on Aug. 8. It plans to use the proceeds to help operate and manage subsidiary KB Life Insurance, according to an Aug. 7 regulatory filing.

Hanwha Engineering and Construction, wholly owned by Hanwha Corporation, raised 250 billion won selling 5.18 percent notes due in August 2016, the data show. It plans to use 193.7 billion won to repay debt and 56.3 billion won for operating purposes, according to an Aug. 6 regulatory filing.

Average yields on three-year corporate notes rated AA- fell six basis points this week to 3.33 percent as of Aug. 8, according to data from the Korea Financial Investment Association. The rate was at 3.48 percent on June 24, the highest since August 2012.

Three-year sovereign note yields decreased four basis points this week to 2.92 percent Thursday. That’s down from 3.12 percent on June 24, the highest since July 2012. The extra yield investors demand to own Korean company notes over similar- maturity government debt has narrowed to 41 basis points from a high last month of 49 basis points reached on July 22.

“Investors who have been shunning corporate notes will come back as yields become more favorable,” Dongbu Securities’ Park said. “All in all, there’ll be more demand and there’ll be more supply.”

This week’s other two won-denominated note sellers - LG Fashion and DGB Capital - will use the proceeds from their sales for operating purposes, respective regulatory filings from the companies show.

International bond sales in Korea also spiked this week, jumping to $1.6 billion from $100 million the prior period, according to data compiled by Bloomberg. Issuance in all of July was $1.9 billion.

SK Innovation borrowed $350 million selling 3.625 percent five-year bonds. Monies will be used to repay debt, company spokeswoman Lee Miji said.

Companies issuing notes overseas are typically exporters or importers looking for better interest rates, Dongbu Securities’ Park said.

Bloomberg