[Donmaekgyeonghwa] Even with Government Spending, 'Cold Wind'... Time Is Needed

Some Corporate Bond Yields Hit 20%
AAA-Rated Public Bond Yields in 6% Range
Under-subscription of High-Quality Public Bonds

[Asia Economy Reporter Junho Hwang] Following the default crisis of asset-backed commercial paper (ABCP) related to Legoland in Gangwon Province, the government has injected over 50 trillion won into the market and proposed additional measures to resolve the deadlock, but the market remains indifferent. With high-quality corporate bond issuances falling short and corporate bond trading yields exceeding 20%, it is forecasted that it will take at least two weeks for funds to circulate before the policy effects can fully materialize.

According to the financial investment industry on the 27th, Floris Retail First Electronic Short-Term Bond (ABSTB), for which Lotte Construction recently signed a capital replenishment agreement, offered an interest rate of 16.8% to raise 30 billion won. Although it is a short-term bond with an AA+ rating and a three-month maturity, it is difficult to secure funds, leading to the high interest rate offer.

Lotte Construction, which signed the capital replenishment agreement for this bond, is a reputable construction company ranked 8th in construction capability evaluation. However, news has emerged that Lotte Construction itself has struggled to raise funds recently and proceeded with a rights offering, prompting it to raise interest rates to attract investors.

The AAA-rated public bond market is also facing difficulties. For the first time since the 2008 financial crisis, AAA-rated public bond yields have exceeded 6% annually. The day before, Korea Electric Power Corporation (KEPCO) bonds offered yields approaching 6% but failed to meet the subscription amount. KEPCO, which planned to issue 200 billion won worth of two-year maturity corporate bonds at a 5.9% interest rate the previous day, only managed to issue 60 billion won. The three-year maturity KEPCO bond yield, which was in the mid-2% range earlier this year, has surged to 5.9%. On the same day, Korea Airports Corporation and Korea Expressway Corporation successfully issued bonds by fully meeting their subscription amounts in auctions but offered high interest rates.

IBK Investment & Securities issued six-month ABCP backed by project financing (PF) bonds for the Busan Port (North Port) commercial business district development project at a high interest rate of 8.05% annually. The asset-backed electronic short-term bond (ABSTB) issued by Korea Investment & Securities, secured by loans for SK On’s battery plant expansions in the U.S. and Hungary, also saw its interest rate jump from 3.5% annually last month to 6.7% this week.

In particular, the short-term funding market is severely strained. According to the Korea Financial Investment Association, the 91-day CP rate closed at 4.37% annually on the 24th, surpassing the three-year maturity government bond yield (4.305% annually) for the first time since the rapid spread of COVID-19 in 2020.

Although the government announced a 50 trillion won liquidity supply plan on the 23rd to break the deadlock, it appears that funds are not circulating deeply within the bond market. As fund circulation did not function properly, the Financial Services Commission began supporting about 3 trillion won in funds from the previous day through RP and securities-backed loans targeting small and medium-sized securities firms, and also proposed measures for securities firms to absorb as much as possible ABCP with good collateral or normal commercial paper (CP) within the capital market.

However, unlike corporate bonds, government bond yields are on a downward trend. The market largely attributes this not to policy effects but to the decline in U.S. Treasury yields due to the possibility of a shift in the U.S. Federal Reserve’s (Fed) stance. The three-year government bond yield fell sequentially from 4.495% annually on the 21st to 4.208% on the 26th. As of the 27th, the yield stands at 4.149% annually.

Jaegyun Lim, a researcher at KB Securities, analyzed, "With the Fed’s talk of slowing down, negative economic indicators such as potential employment contraction ease concerns about Fed tightening, which is a factor in the decline of yields," adding, "The political risk in the UK, which had been a volatility factor in financial markets since the end of September, seems to have settled with Rishi Sunak confirmed as the next prime minister."

In the bond industry, it is believed that the Legoland short-term bond crisis began at the end of last month, and the severe funding squeeze started in earnest after Gangwon Province Governor Jin-tae Kim declared a default earlier this month, so it will take about two weeks to a month for policy effects to appear.

Dongilak Gong, a researcher at Daishin Securities, said, "Typically, when an issue arises in the bond market, regardless of the interest rate level, whether funds can be raised or not becomes the most important investment criterion," adding, "In a highly uncertain situation, no one is brave enough to put money in." He further stated, "There may be physical anxiety, but expecting policies to be immediately reflected in the market is unrealistic."