[Donmaekgyeonghwa] Frozen Bond Market... Issuance Interest Rate Reaches 16.8%

Even with Investment Grade, Construction Company Guaranteed Bond Trading Yields Exceed 15%

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Due to the tightening of the short-term real estate funding market, developers are raising funds by offering interest rates exceeding the mid-teens of 10%. As the tightening wave, including interest rate hikes, prolongs, the situation has worsened with the refusal to guarantee payment of the Chuncheon Legoland ABCP (Asset-Backed Commercial Paper) in Gangwon Province, deepening the 'financial blockage' phenomenon where financial institutions are reluctant to supply funds.

According to the bond industry on the 27th, 'Floris Retail First SPC' offered an interest rate of 16.83% per annum for a 3-month maturity asset-backed electronic bond (ABSTB) issuance amounting to 30 billion KRW (settlement amount 28.8 billion KRW) issued on the 25th. This ABSTB was issued to repay the previously issued ABSTB (100 billion KRW) from August, with the remaining 70 billion KRW issued as ABCP. This was issued based on loan receivables held by the borrower 'Secondo,' who signed a loan agreement related to the acquisition of four Homeplus stores (Yeongdeungpo, Geumcheon, Dongsuwon, Centum City) by the SPC.

Although Lotte Construction (A2+) stepped in as the debt assumer (buyer) for the bond, the issuance had to be finalized at a high interest rate exceeding 15%. This was due to concerns from investors about Lotte Construction's creditworthiness amid a stagnant real estate project financing (PF) market. Lotte Construction's contingent liabilities on PF amount to a total of 6.7 trillion KRW, with 3 trillion KRW maturing by the end of this year. Negative sentiment was also fueled by news that group affiliates such as Lotte Chemical and Hotel Lotte undertook a 200 billion KRW shareholder allocation rights offering and a 500 billion KRW short-term borrowing.

On the same day, there was also a case of bonds trading at a 20% interest rate in the distribution market. Spellbind 16th, for which DB Financial Investment provided a purchase commitment, was traded at 20% interest with 1.3 billion KRW remaining two days before maturity. This bond was to acquire beneficiary certificates issued by 'Mirae Asset MAPS US General Private Real Estate Investment Trust No. 18,' which holds stakes in seven Amazon logistics centers in the US and one logistics center in Texas. A bond market insider said, "Since there are no buyers in the market, bonds are being offered at higher interest rates," adding, "The fact that interest rates approaching 20% are being offered shows that the short-term funding market is walking on thin ice."

In the first half of this year, although there were differences by rating, the issuance interest rate for ABSTB was formed within 5%. However, as investment sentiment in the real estate financial market deteriorated sharply, interest rates soared more than threefold. The fact that construction companies with weakened liquidity or small- and medium-sized securities firms have provided guarantees has further fueled the rise in interest rates. To issue ABSTB, securities firms or construction companies provide payment guarantees, but if the SPC lacks funds, the securities firms or construction companies that stepped in as assignees may be unable to pay the shortfall, spreading this concern. In fact, in the distribution market, this credit risk has been reflected in interest rates, with short-term bonds guaranteed by large construction companies with high ratings reaching around 15%, and those guaranteed by small- and medium-sized securities firms approaching 9-10%.