[Bond Market Diagnosis] ② Polarization of Capital Bonds... Only Financial Holding Affiliates Issue

Only Capital Companies Rated AA or Higher Issue Corporate Bonds
Capital Companies Rated A or Lower Rely on Short-Term CP Issuance or Bank Loans

The liquidity crunch triggered by the Legoland incident swept through the bond market once. The government-led large-scale liquidity supply to the market put out the urgent fire. However, uncertainties still remain. Interest rates are expected to stay high next year, and credit risk is anticipated to increase due to worsening corporate earnings and an economic recession. The unsold inventory in the real estate market has expanded to a frightening extent, remaining a risk factor for the bond market. The bond market is walking on thin ice. How long will the somewhat stabilizing atmosphere last? We diagnose the current situation and risk factors.

[Reporters Hwang Yoon-joo and Lim Jung-soo] The drought in bond market liquidity has eased, opening the way for capital companies to raise funds. However, only some financial holding company-affiliated capital firms have succeeded in issuing bonds. Non-financial holding company-affiliated capital firms rated A or below, without strong 'backing,' still cannot raise funds due to concerns over asset deterioration such as project financing (PF) loans. Even the high-quality capital firms that succeeded in bond issuance are struggling with how to increase assets amid soaring funding costs.

According to the Korea Financial Investment Association on the 19th, other financial bonds including capital bonds saw a net issuance (issuance amount minus redemption amount) of 3.832 trillion won over the past month. Until just two weeks ago, credit finance companies that could not raise funds pushed forward a large amount of bond issuance all at once, significantly increasing issuance volume. This is a stark contrast to the two months after the Legoland incident when they could not raise funds and only repaid maturing bonds. Market conditions have rapidly improved.

However, bond issuance was concentrated among high-quality capital firms rated AA or above. In particular, capital firms affiliated with banks succeeded in raising funds. KB Capital, Shinhan Capital, NH Nonghyup Capital, Hana Capital, Woori Financial Capital, Korea Development Bank Capital, IBK Capital, BNK Capital, DGB Capital, and JB Woori Capital issued bonds. Among non-bank affiliates, only Hyundai Capital, Mirae Asset Capital, and Meritz Capital, all with credit ratings of AA or higher, succeeded in bond issuance.

Capital firms rated A or below, which had steadily issued bonds until September, have not been able to issue bonds and are relying on short-term commercial paper (CP) issuance or bank loans for necessary funds. Even this is not easy to secure. OK Capital, M Capital, RCI Financial, Korea Capital, Korea Investment Capital, and Lotte Capital have hardly issued bonds since September.

An investment banking (IB) industry insider said, "Capital firms affiliated with non-banks or rated A or below still find it difficult to issue bonds and cannot secure operating funds," adding, "Concerns over asset deterioration from project financing (PF) loans executed by capital firms have not subsided, so it will not be easy to raise funds for some time."

Even capital firms that can issue bonds are deeply concerned about the burden of high interest rates. Currently, the 3-year bond funding rates for high-quality bank-affiliated capital firms are formed in the 6-8% range. To offset funding costs and generate profits, they need to lend at around 10% or invest in assets yielding higher returns. However, high-interest assets carry greater default risk, making it difficult to aggressively increase investments or loans.

A capital firm's finance officer said, "If we raise funds at high costs and increase high-risk, high-return assets, the risk of default inevitably grows," adding, "Although the market drought has eased, it is quite burdensome to aggressively raise funds due to high interest rates and concerns over asset deterioration."