Sales of hybrid securities are soaring

Sales of hybrid securities in Korea have tripled this year as companies including Lotte Shopping and SK Telecom sought to stave off debt-rating downgrades with stronger balance sheets.

Total issuance of the securities that have components or conditions that allow them to be treated as equity for accounting purposes surged to 2.38 trillion won ($2.24 billion) this year from 675 billion won in 2012, according to Bloomberg data that excludes financial companies. Lotte Shopping, whose ratings Moody’s Investors Service and Fitch Ratings warned could be downgraded, raised 270 billion won with its inaugural sale of hybrids earlier this month.

Balance sheets are under pressure after borrowing by publicly traded companies surged 50 percent to the equivalent of $602 billion amid suppressed rates after the 2008 global financial crisis. The country’s companies issued $192 billion worth of bonds scheduled to mature in 2014, the most since 2010, with $183 billion still outstanding, Bloomberg data show.

“For top-rated companies, selling hybrid securities is a good tool for increasing equity without diluting shareholders’ rights,” said Jeong Dae-ho, credit analyst at KB Investment & Securities. “While long-term investors such as insurers do have an appetite for higher-yielding bonds with longer maturities, it may not be easy to attract other investors because hybrid securities aren’t nearly as tradable.”

The 30-year hybrid bonds sold by Lotte Shopping yield a fixed rate of 4.723 percent for the first five years, which is 150 basis points more than the similar-maturity government bonds, according to data compiled by Bloomberg. That compares with a 39 basis point average premium for five-year similarly-rated corporate bonds. The yield on the 10-year government bond is little changed this week at 3.68 percent.

Lotte has a right to buy back the hybrids after five years, when the yield will be reset according to the rate on government bonds at that time. If the company doesn’t purchase them after 10 years, it has to offer 100 basis points more than the existing fixed rate.

The surge in borrowing coincided with a jump in mergers and acquisitions by Korean companies, with announced deals hitting a record $52.1 billion in 2012, according to data compiled by Bloomberg. Lotte Shopping’s 1.25 trillion won takeover of Lotte Himart was the fifth-biggest deal of the year and the fourth-largest retail acquisition since 2000, the data show.

SK Telecom, Korea’s No. 1 mobile-phone operator, faced its rating cut after its 3.4 trillion won takeover of SK Hynix, which was the company’s biggest purchase, the data show. Total liabilities of the company surged to 9.87 trillion won as of 2012, from 8.55 trillion won in 2011. Moody’s, Fitch and Standard & Poor’s downgraded its creditworthiness immediately after the acquisition, which was more than 50 percent-funded by debt.

Posco, the formerly state-owned steelmaker, was downgraded by Moody’s on Nov. 25. The company announced $7.6 billion worth of deals since the start of 2011, including its $1.5 billion acquisition of Roy Hill Holdings from Gina Rinehart, Australia’s richest woman.

While Standard & Poor’s Rating Services affirmed Posco’s BBB+ long-term rating in May, the company’s outlook was revised to negative because of its high debt and cash-flow concerns. Posco, whose net income dropped 44 percent from 2009 through 2012, sold 1 trillion won of hybrids in June while Posco Energy issued 500 billion won of hybrids in August.

“We believe Posco’s continuing non-debt financing, increasing sales volume and declining capital investment are likely to improve its credit quality and keep measures of its performance below our rating downgrade trigger next year,” S&P analysts wrote in a May 30 report.

The specter of downgrades for some of Korea’s most well-known companies comes even as momentum in Asia’s fourth-biggest economy is poised to accelerate to the fastest since 2010. The improvement is being led by Seoul, and the middle and southwest areas of the country, the Bank of Korea said in a quarterly “Golden Book” report released Nov. 27 in Seoul. The central bank on Oct. 10 projected 2.8 percent growth this year and 3.8 percent growth next year, the fastest since 2010, when the economy expanded 6.3 percent as it pulled out of a global downturn.

The BOK warned the appreciation of the won threatens to damp exporters’ profit as the currency hit its highest level versus Japan’s yen in five years. The won reached 10.374 per yen yesterday, the strongest since September 2008, and traded at 1,061.35 against the U.S. dollar in Seoul.

Bloomberg