Local foreign currency notes, ‘Kimchi bonds,’ are popularKorean borrowers, facing a record $42.2 billion in bond maturities, are raising the most dollars at home in almost three years as the government encourages issuers to tap idle foreign-currency deposits.
State-run Export-Import Bank of Korea and Korea Southern Power sold $400 million of so-called Kimchi bonds this quarter, the highest since $1.37 billion in the three months ended June 2011, data compiled by Bloomberg shows.
Sales slumped to $721 million in the last two and a half years after institutions were banned from buying such notes to curb short-term external debt that contributed to financial crises in 1997 and 2008.
Issuances are rising after policy makers urged state enterprises in December to refrain from borrowing overseas and tap local foreign-currency deposits that soared to an unprecedented $49.2 billion in January. The fund-raising will support the won, Asia’s worst performer this year, as U.S. stimulus cuts trigger a slide in emerging markets with less healthy external finances such as Turkey and Argentina.
“The policy of utilizing foreign-currency supply at home is bringing the market back to life,” Louis Shin, a credit analyst at Woori Investment and Securities, said. “We should see brisk sales of Kimchi bonds this year.”
The current-account surplus in Asia’s fourth-largest economy climbed to an all-time high of $70.73 billion last year, and the nation’s central bank forecasts a $55 billion excess in the broadest measure of trade in 2014.
The amount of maturing debt Korean companies and financial institutions face this year is 48 percent higher than $28.6 billion in 2013, data compiled by Bloomberg shows. The Export-Import Bank of Korea tops the list with $4.7 billion due, followed by Korea Development Bank with $3 billion.
President Park Geun-hye last year ordered state enterprises to reduce their liabilities and Moody’s Investors Service said in a Nov. 8 report the borrowings are a “contingent liability on the government’s balance sheet” and a “constraint” on the country’s Aa3 credit rating, the same as China, and the fourth-highest investment grade.
Total borrowings by state-owned companies, including local-currency debt, surged to the equivalent of 41 percent of gross domestic product in 2012 from 24 percent in 2008, according to Finance Ministry data.
The government in July 2011 imposed restrictions on the volume of Kimchi bonds, after short-term overseas debt jumped by the most in more than two years in the first quarter, contributing to the won’s surge to a three-year high at the time.
The Korean currency slumped 26 percent in 2008 after sales of such debt with maturities of less than 12 months increased for 11 straight quarters through September that year. The pattern was similar in 1997, when the Asian crisis halved the won’s value as funds flowed out to repay external borrowings and investors fled.
Abundant foreign currency
Korea Southern Power sold $100 million of three-year Kimchi bonds on Jan. 29 at 105 basis points more than the U.S. dollar London interbank offered rate. The sale came a week after the Export-Import Bank of Korea raised $300 million in its first issuance since 2008. It borrowed $80 million for three and a half years at 63 basis points above Libor and $220 million for 10 years at 3.95 percent coupon.
The yield on the government’s benchmark 10-year notes fell one basis point, or 0.01 percentage point, to 3.53 percent yesterday, data compiled by Bloomberg shows.
“Foreign currencies are abundant in the domestic market thanks to sustained current-account surpluses,” Kim Jin-seop, the head of the Export-Import Bank of Korea’s overseas funding team.
“There’s robust demand for the securities. We will continue to use the Kimchi bond market to raise dollars.”
Tongyang Securities predicts more banks and companies will tap the Kimchi bond market as they could lower issuance costs, while domestic investors could also benefit from better spreads than investments in local bonds.
The gap between two- and 10-year sovereign bonds is 79 basis points, compared with a 236 basis-points spread on similar U.S. treasuries, according to data compiled by Bloomberg.
“Kimchi bonds are an attractive investment option,” Lee Jae-hyung, a credit analyst at Tongyang. “Especially for domestic insurers faced with a flat bond curve at home who are looking overseas for higher yields.”
The sale of Kimchi bonds may help shore up the won, which has weakened 2 percent against the dollar this year, the biggest drop among the 11 most-active Asian currencies tracked by Bloomberg. It touched 1,089.71 per dollar this month, the weakest since Sept. 11, after gains of 1.4 percent last year and 8.3 percent in 2012.
The government is stepping up monitoring of financial markets and closely watching for any spillover effects from instability in emerging markets, Finance Minister Hyun Oh-seok said late last month. As much as $3 trillion has been wiped from global equities in 2014 due to China’s slowdown, cuts to U.S. stimulus and unrest in developing nations such as Thailand and Ukraine.
“Korean officials may be increasingly concerned about the pace of the won’s decline, or if there are increasing signs of herd behavior in each sell off,” Wai Ho Leong, a strategist at Barclays in Singapore, said. “It makes sense to allow financial institutions to tap dollar liquidity in Korea, which is in excess at the moment. This is a solid buffer.”