Corporations rush to bond market to lock in the low rates

Corporations are rushing to the bond market in the new year.

GS issued 200 billion won ($181.8 million) of bonds paying 1.3 percent on Friday. The total was 80 billion won more than the amount committed during book building. The company issued additional bonds because the demand was 14 times higher than the initial target of 120 billion won.

GS is planning to use 100 billion won to pay back debt and the rest for operations, which includes investing in GS Futures, a VC arm of the company founded in July for early-stage investments.

During every round of book building, trillions of won were committed.

The corporate bond of SK Telecom (SKT), which is rated AAA, is a good example. The competition was fierce during the book-building round on Jan. 7. Orders totaled 1.17 trillion won, for a 5.8-to-1 competition ratio. SKT issued 310 billion won of corporate bonds on Friday, 110 billion won more than the amount raised during the book-building round, when 200 billion won was marketed.

Lotte Chilsung Beverage received orders for 1.75 trillion won during book building, surpassing the intended goal of 160 billion won. The competition rate was 10.9:1.

According to Samsung Securities, the estimated amount of bonds to be issued by local firms in January is 3.02 trillion won.

“If the demand increases, the issued amount can reach as high as 5.2 trillion won,” said Park Tae-geun, head of the global bond team at Samsung Securities. “[At this rate], the amount may exceed last year’s 4.6 trillion won, and it is safe to say that the corporate bond market is back to the pre-coronavirus levels.”

The background behind corporate success in corporate bonds is the right balance between demand and supply. Recently, corporations have been issuing bonds earlier than in previous years because of low interest rates. Meanwhile, cash-rich institutional investors are buying the bonds.

The low interest rate is the primary reason behind the issuance of corporate bonds. According to the Korea Financial Investment Association (KFIA), the average interest rate for three-year AA- corporate bonds is 2.13 percent. Due to the coronavirus pandemic and with globally low interest rates, the market rate has been around 2 percent for almost a year.

However, the pressures for interest rate increases are becoming stronger as there are signs that the economy might improve with vaccines. The 10-year U.S. Treasury rate has been on the rise, which often signals the upward movement of interest rates. The interest rate, which hovered around 1 percent in March, broke 1 percent on Jan.6, reaching 1.15 percent on Jan. 11.

“As we approach the second quarter, there is a higher chance that the corporate bond rate might rise,” said Shin Hwan-jong, the head of FICC research center at NH Investment & Securities. “Corporations are scrambling to issue corporate bonds to procure capital cheap before the interest rate rises further.”

“Recently, as the number of investors has been rising rapidly, the interest rate on the three-year AA- corporate bonds traded in the market has fallen to as low as 1.34 percent.”

“For companies, this is the right time to issue corporate bonds at a cheap price.”

The supply is decent due to the effects of the new year. In January, institutions create investment portfolios and deploy their money. As the expectation for global economic recovery increases, the preference for risky assets is increasing as well. As a result, institutional investors with copious amounts of money are placing healthy corporate bonds in their portfolios instead of government bonds, with around 1 percent.

Environmental, social and governance (ESG) bonds released by corporations have also been popular. Globally, there has been a tendency for corporations to prioritize those types of investments for corporate social responsibility (CSR). The national pension is planning to invest half of its assets into ESG firms by the end of next year. In order to achieve the goal, the pension is planning on factoring in CSR when it selects brokers.

Hyundai Steel is a representative case for hitting the jackpot for ESG bonds. Hyundai Steel went through book building on Monday ahead of issuing a 250-billion-won ESG bond to institutional investors. The bonds were widely popular, as 2.07 trillion won was committed.

The polarization in the bond market is becoming worse because investors are going for high-quality corporate bonds that are rated higher than A-. Companies whose bonds are rated at BBB+, which used to be sold out in previous years, have been struggling.

Bond experts expect the investment fury surrounding blue-chip corporate bonds to continue.

“The institutional investors will continue to concentrate on blue-chip corporate bonds instead of putting their money into the government bonds, which have a low yield,” said Park. “There will likely be steady supply, since the institutions prefer to hold bonds until maturity.”

“Until the pressures for a higher interest rate get higher internationally, companies may issue more corporate bonds,” said Han Kwang-yeol, an analyst at NH Investment & Securities. “As the attractiveness for investment in corporate bonds overrides that of government bonds in terms of interest rate, the demand for corporate bonds is likely to continue until the summer.”

BY YEOM JI-HYUN [lee.jeeyoung1@joongang.co.kr]