Bonds are back in Korea as investors go big on corporates

[THE JOONGANG ILBO]

The corporate bond market is starting to recover as investors warm up again to company debt, already lodging orders for 18 trillion won ($14.4 billion) of the paper in the new year.

This surprising turnaround comes after a rough 2022, in which prices collapsed as benchmark rates rose and some defaults and delays rippled through the market.

Preliminary demand was 17.95 trillion won for 1.67 trillion won of debt from 10 companies, including Posco and LG U+. SK hynix doubled its bond issuance to $1 billion due to strong demand from institutional investors, the company said Wednesday.

It's selling sustainability-linked bonds (SLB), where the rate moves based on whether the issuer achieves certain pre-set environmental, social and governance objectives. SK hynix has announced that it aims to reduce greenhouse gas emissions by 57 percent of 2020 levels by 2026.

“We consider it a significant feat to have big-scale investments coming into the market despite the downturn in the semiconductor industry,” SK hynix said in a statement. “It’s a signal to hope that the industry will rise this year with global investor support, and an achievement representing the trust people put in the company as we aim to resolve pressing problems like global climate change.”

Hyundai Steel received 1.8 trillion won of preliminary orders for corporate bonds Tuesday, which is nine-fold the 200 billion won that had been planned.

Posco raised $2 billion of international bonds, according to the steelmaker on Tuesday. It was the first bonds issued in dollars by a domestic company this year.

Institutional investors purchased 3.97 trillion won of the bonds from Posco, larger than the initial plan of 350 billion won.

“This issuance of bonds is anticipatory financing in case of a liquidity crunch,” said a Posco spokesperson. “Part of the bond issuance will be used to cover our debts.”

“This month’s pre-demand will definitely exceed that of January 2022, which was 8.77 trillion won,” said analyst Kim Eun-ki of Samsung Securities.

Three months ago, the market almost froze following the Legoland debacle at the end of September. Last year, even large corporations, such as LG U+ and Hanwha Solutions, faced challenges in the credit markets.

Korea’s efforts to supply 20 trillion won to the market from last October helped activate investor sentiment and stabilized the market, experts say.

Another contributing factor was that corporate bond supply clicked with the demand from institutional investors. Corporations are moving up bond issuance dates to raise funds.

The interest rate gap between three-year government bonds and corporate bonds are perceptibly narrowing. The gap between the three-year government bond and three-year corporate bonds was 1.331 percentage points as of Tuesday, according to Korea Financial Investment Association. The gap was reduced by 0.441 percentage points compared to early December, where it was 1.772 percentage points.

The timeliness of the new year issues also helped, as January is conventionally a time where investors tend to open their wallets.

Companies rated below AA may not benefit. Large corporations with good credit ratings may be relieved, but small- and mid-sized enterprises with relatively weak credit may have trouble borrowing money.

“The polarization may widen as the investor sentiment is only livened for AA-rated big corporations,” analyst Park Tae-geun of Shinhan Securities forecast.

“AA-rated corporations will take up 99 percent of the bond market,” Kim said. “It may take quite a while for the warmth of the market to spread down to A-rated companies as earnings fall and the economy slows down.”

Another factor to consider is the pressure the construction industry faces due to a stagnating real estate market.

“The construction industry as well as related real estate project financing companies may also have trouble issuing bonds due to high interest rates and falling housing prices,” manager Lee Sung-won of Nice Investors Service said.

BY YEOM JI-HYEON, LEE JAE-LIM [lee.jaelim@joongang.co.kr]