Bond sales in won start 2014 low on back of corporate mistakes

Korean won-denominated bond sales slumped to the worst start to a year since 2008 as corporate failures drove investors into higher-rated notes.

Total issuance fell 8 percent to 8.5 trillion won ($8.08 billion) in the first quarter, as offerings by nonfinancial companies rated A or below plunged to a 16-year low of 746 billion won. Samsung Everland, a locally AA+ rated member of the corporate group that includes Asia’s largest electronics maker, boosted a bond sale by 67 percent last week on the back of demand that’s seen yield premiums on top-rated corporate securities narrow to a nine-month low.

Debt markets are polarizing as investors shun lower-rated companies’ notes after a string of corporate failures in 2012 and 2013, the Bank of Korea said Monday. Supply of high-grade debt has been limited due to a crackdown on borrowing at state-owned enterprises, prompting investors to buy bonds of leading business groups.

“The investor pool is still restricted for companies rated A and below because most investors are still favoring notes from corporates that have solid credit,” said Park Sung-won, the managing director of the corporate finance division at KB Investment and Securities, the top arranger of won bond sales this year. “Samsung Everland, being one of the safer units among Samsung Group affiliates, could be the best substitute for state-owned enterprise bonds.”

Korea’s economy will expand 3.6 percent in real terms this year after growing 3 percent last year, according to estimates and data compiled by Bloomberg. While overall financial conditions remain favorable, companies in “depressed business fields” or with low credit ratings will still face funding difficulties, the central bank said in its March Monetary Policy Report.

Korea’s 10-year won government-bond yield rose six basis points to 3.58 percent this week. The yield premium on AA+ rated three-year corporate notes has tightened to 28 basis points, near the record low of 24 basis points in February last year. The gap between the yield on AA+ rated corporate notes and those graded A- widened to 106.5 basis points on March 27, the highest since 2010.

The won fell 1.4 percent to 1,064.7 to the U.S. dollar last quarter, the biggest drop outside China and Taiwan by an Asian currency. In a win for exporters, the won also dropped 3.1 percent against the Japanese yen.

Samsung Everland increased its latest offering to 500 billion won after receiving 760 billion won of orders, according to a March 28 regulatory filing. The company priced three- and five-year notes to yield 3.111 percent and 3.407 percent respectively.

Samsung Everland plans to buy new shares in Samsung Biologics, which will research and develop biopharmaceuticals, the unit said in a Feb. 4 regulatory filing.

Samsung Group affiliates raised 1.2 trillion won selling domestic bonds this year. Samsung C&T, with a AA- local rating, sold 400 billion won of securities while Samsung Total Petrochemicals, rated AA, sold 300 billion won of notes. Hotel Shilla, a Samsung unit that’s the country’s largest listed duty-free operator, may sell 150 billion won of paper this month.

While total won bond sales declined, issuance by companies rated better than A+ rose to 6.96 trillion in the first quarter from 6.03 trillion in the same period last year. Lower-rated notes accounted for just 19 percent of the market in the first three months from 35 percent.

At the same time, state-owned enterprises slashed sales of won bonds by 41 percent to 14.26 trillion won, Korea Financial Investment Association data show.

Korea is forcing SOEs to trim their balance sheets. The average debt-to-equity ratio at 51 public companies must be reduced to 200 percent by 2017 from 220 percent at the end of 2012, the Finance Ministry said in a Dec. 11 statement.

“Companies rated AA or above enjoy stronger demand while the financially weak companies are suffering difficulty in raising funds,” the Bank of Korea said. “Given the still-dim business outlook for low-credit companies in weak industry sectors, the gap between the top-credits and low-credits is unlikely to narrow much as investors will likely remain risk averse.”

The widening yield spread is a call for “discipline” from the financial markets, a Bank of Korea policy maker said, according to minutes of a March 13 meeting. Some of the seven- member policy board called for closer monitoring of the bond market as lower-rated firms struggle to refinance debt.

KT ENS, a unit of Korea’s second-biggest mobile operator that had been rated A by domestic firms, filed for receivership on March 12 as 49 billion won in commercial paper came due.

The failure will hurt banking relationships and access to capital markets for affiliates of KT, according to a March 20 statement from Standard & Poor’s. The global creditworthiness assessor revised the outlook on KT’s A- long-term rating to negative.

“Investors are wary of A rated bonds because there’s even been defaults in that space,” Lee Jae-il, a credit analyst at Woori Investment and Securities said on April 1.

“There’s still uncertainty about the recovery of cyclical industries such as construction and transportation.”

Woongjin Holdings, with ratings of A- and BBB+, and its subsidiary Kukdong Engineering and Construction filed for court receivership in September 2012. STX and its subsidiaries petitioned for voluntary debt rescheduling in May, while a shipping unit, STX Pan-Ocean, sought court rehabilitation in June.

Five affiliates of Tongyang Group filed for bankruptcy protection in September.

Builders including GS Engineering and Construction, SK Engineering and Construction and Lotte Engineering and Construction have turned to equity instruments such as shares or convertible notes instead of bonds.

Dongbu, a BBB-rated builder, will sell 40 billion won of new shares, according to a March 28 regulatory filing.

“Companies that have difficulty selling bonds need to improve their earnings and speed up restructuring to rekindle investors’ appetite,” Woori Investment’s Lee said. “This polarization will likely continue for a while.”

Bloomberg