Corporate Bond Market Cooling Period... Companies Struggling to Raise Funds

Institutional Funds Flock Only to High-Grade Bonds Amid Interest Rate Hikes
Repeated Failures in Popularity Below A Grade

[Asia Economy Reporter Minji Lee] Cases of companies failing to raise funds in the corporate bond issuance market have emerged amid rising government bond yields. This is interpreted as reflecting the impact of institutions halting investments in all but high-grade (A grade and above) bonds to reduce bond valuation losses.

According to the Seoul bond market on the 26th, the 3-year government bond yield closed at 1.91% the previous day, setting a new annual high, the highest level since December 3, 2018 (1.924%). The 2-year bond also recorded an annual high at 1.647%. The 5-year mid- to long-term bond yield reached 2.24%, the highest since October 10, 2018 (2.245%). The global rise in tightening concerns has sustained the upward trend in yields.

As government bond yields surged sharply, the corporate bond market also appeared to be affected. Companies are heading to the corporate bond issuance market to raise funds before further base rate hikes, but institutions are closing their wallets due to concerns over bond valuation losses amid rising yields. Last month, except for high-yield (high return, high risk) bonds, most grades saw issuance amounts roughly double compared to previous demand forecasts, but such cases are now hard to find. Particularly, bonds rated A or below have seen failed issuances, receiving less than the planned amount.

For example, HK Innoen (A-) issued a 2-year bond worth 50 billion KRW to refinance acquisition financing but only raised 40 billion KRW, finalizing the issuance amount through additional subscriptions. W Games (A-) also received orders for only 7 billion KRW out of a planned 50 billion KRW for its first 2-year corporate bond issuance, forcing the underwriter, Korea Investment & Securities, to absorb the unsold portion to finalize the issuance amount. Even financial firm Woori Investment & Securities (A) failed to raise the full 20 billion KRW planned for its 2-year ESG (Environmental, Social, and Governance) bonds. Researcher Eun-gi Kim of Samsung Securities explained, "The average demand forecast competition ratio this year was 3.96 times, but it dropped to about 2.6 times this month. Demand for corporate bonds rated A or below with maturities under two years, which are heavily invested in by asset management companies, has been affected because rising yields have caused significant bond valuation losses, making active purchases difficult without additional capital inflows."

The securities industry expects the corporate bond issuance market to remain cool until the end of the year. Since the August decision by the Monetary Policy Committee to raise the base rate, tightening concerns have increased, along with growing anxiety that the prolonged U.S. inflation could lead to higher rate hikes. Researcher Hwajin Lee of Hyundai Motor Securities said, "With yields rising sharply, companies seem to be trying to catch the last issuance train rather than waiting for the early-year effect (building demand among institutions). If the Monetary Policy Committee’s additional rate hikes and the U.S. tapering (asset purchase reduction) policy are fully reflected in the market next month, demand could recover within the first quarter of next year."