Corporate bonds in won take a nosedive in 2013Offerings of won-denominated company bonds in Korea plunged by the most on record as corporate failures from Tongyang Group to STX Corp. dimmed investor appetite for lower-rated debt.
Total sales slid 42 percent in 2013, the biggest drop in compiled data going back to 1999. Companies rated A or below led the slump, issuing 7.01 trillion won ($6.6 billion) compared with 12.87 trillion won in 2012.
Investors are demanding the biggest yield premiums over government securities in almost two years after the collapse of shipbuilder STX and units of chaebol Tongyang Group rattled markets. Samsung Securities said in a Dec. 9 report that issuance may drop further as investors avoid companies rated less than AA-. That may make it harder for companies to refinance some of the 129 trillion won that comes due next year.
“Big corporate failures led individual and institutional investors to avoid companies rated A and below, which squeezed their bond issuance,” said Chun Byoung-jo, executive vice president of KB Investment and Securities, 2013’s top underwriter. “As interest rates are expected to rise now that the Fed taper has started, those companies may have more difficulty raising funds through bond issuance, while demand for companies with solid credit is expected to remain steady.”
The spread between three-year corporate notes rated A and similar-maturity government yields jumped to 101 basis points as of Dec. 24, the widest since Jan. 27, 2012, according to data compiled by Bloomberg. Ten-year government notes yielded 3.57 percent on Dec. 24, down from a high this year of 3.75 percent on Dec. 5.
Sales of won-denominated notes plunged to 31.913 trillion won this year, the least since 2008, from 54.775 trillion in 2012. Faced with waning investor appetite for bonds, companies from Hyundai Group to Doosan Engineering and Construction and Korean Air Lines are selling assets or considering borrowing offshore to refinance. The currency is forecast to rise to 1,040 by the end of 2014, a Bloomberg survey of analysts shows.
‘‘We are considering selling foreign currency-denominated bonds because the domestic corporate-debt market isn’t favorable for low-rated companies,” said Kim Ju-yeol, a spokesman for Doosan Engineering, rated BBB+ by domestic agencies. “We can diversify our funding sources.”
The company sold 100 billion won of two-year notes at 7.8 percent on Sept. 16.
The yield on investment-grade bonds denominated in U.S. dollars or euros has fallen 45 basis points since the year’s high of 2.83 percent on July 5, Bank of America Merrill Lynch indexes show. Sales of international bonds by Korean firms dropped 9 percent to $33.2 billion this year.
Korean Air Lines, formerly the biggest issuer among companies with a rating below AA-, has 1.07 trillion won of domestic bonds maturing next year, data compiled by Bloomberg show. The carrier decided to sell 30 million shares of refiner S-Oil last week to raise 2.2 trillion won. The company didn’t issue unsecured notes at all in the domestic market this year. Instead, it sold the equivalent of 900 billion won of securities backed by ticket receivables.
Hyundai Group, with businesses from shipping to stock broking, will sell Hyundai Securities, two other financial units and a hotel to raise as much as 3.3 trillion won, the company said Dec. 22. Hyundai Merchant Marine refinanced 280 billion won of maturing debt in October through the help from a state-backed refinancing program.
“Corporate bond sales will decrease further in 2014 as cyclical industries including construction, shipbuilding, shipping and steel will continue to struggle,” said KB Investment’s Chun. “Companies may get funding through banks if the interest-rate difference between corporate bonds and banks narrows, and this may also squeeze of the corporate note issuance.”
Korea’s bank loans to companies rose every month since December 2012, according to data from the Bank of Korea. Bloomberg