Korean corporations struggle to issue debt in volatile market

Interest rates on Korean treasuries displayed at Yonhap Informax in Seoul on Friday. [YONHAP]

Korean corporations are having a tough time selling debt as investors anticipate higher interest rates.

Despite having a good credit rating, Daewoo E&C was forced to issue primary collateralized bond obligations (P-CBO) last month.

This is the first time the construction company has sold P-CBOs, which are an asset-backed securities guaranteed by the Korea Credit Guarantee Fund. They are normally for smaller companies with weak credit ratings.

SK REIT, which owns office buildings in downtown Seoul and 116 SK gas stations, has been trying to issue 96 billion won ($67 million) of corporate bonds, but it failed to attract institutional investors even when offering an annual interest rate of 5.1 percent.

"Institutional investors seem to be on the sidelines as they expect bond prices to drop with the further increase in interest rates," said an asset management company official who requested anonymity.

Korean companies are struggling to raise money in the aftermath of the U.S. Federal Reserve's recent interest rate increases.

With a recession becoming more likely and bond values falling due to higher rates, investors are reluctant to lend.

According to the Financial Supervisory Service, the issuance of corporate bonds by non-financial companies in August shrunk 59.3 percent on month to 1.3 trillion won.

Companies with lower credit ratings are struggling more.

Only 12 percent of bond sales in August were by companies rated AA or lower, down from about 23 percent in July.

On Thursday, the yield on a AA three-year bond was 5.378 percent, which is a sharp increase from the 2.46 percent on Jan. 3.

The yield on the 10-year U.S. Treasury broke 4 percent briefly on Wednesday before settling down to 3.736 percent after the Bank of England intervened in the bond market.

Rising interest rates on U.S. Treasuries is spilling over to Korean corporate bond interest rates.

There are worries of a major panic likened to the "great bond market massacre" in 1994, where investors globally lost more than $1 trillion after bond values plummeted when then U.S. Federal Reserve Chairman Alan Greenspan raised interest rates.

The Korean government has tried to deal with the volatility in the market by announcing a 2 trillion won emergency buy back of bonds.

Rates " quickly stabilized after the government intervention on Wednesday," said Lim Jae-kyun, KB Securities analyst. "However, it is not enough to turn the situation around in the long term as there are still external uncertainties, including the strong reaction of the U.S. Federal Reserve and the instability of the British financial market."

Yoo Jeong-joo, head of the corporate planning team at the Federation of Korean Industries, warned that frequent intervention by the Korean government in the bond market could send a wrong signal to global investors.

"If skepticism about the ability of Korean companies to pay back debt starts spreading, it could lead to a bond market massacre crisis," Yoo said.

BY KIM DO-NYUN, LEE HO-JEONG [lee.hojeong@joongang.co.kr]