[Bond Market Diagnosis] ③ PF Corporate Paper Bomb 'Tick Tock'... 29 Trillion Won in Refinancing Due by February Next Year

Prime Grade CP Market Regains Stability, Reducing Interest Rate Burden
Potential for PF ABCP Interest Rate Pressure if Real Estate Market Worsens Due to Rising Unsold Units

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, concerns 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 surge in unsold properties in the real estate market remains 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 Minji Lee and Jeongsu Lim] With government support supplying liquidity to the short-term financial market, the commercial paper (CP) market is also showing signs of stabilization. However, concerns persist in the project financing (PF) asset-backed commercial paper (ABCP) market due to the expansion of unsold properties. The scale of PF ABCP that must be refinanced by February next year reaches 29 trillion won. Amid this, there are concerns that if unsold construction projects increase further due to the downturn in the construction industry, market liquidity could face problems again.

According to the financial investment industry on the 19th, the weighted average CP interest rate, which soared to 5.54% after the Legoland incident, has recently been declining and stood at 5.46% as of the 16th. Issuance rates are falling, and investment demand is supporting the market. However, this is limited to A1-rated CP. A bond management officer at an asset management firm said, "For A1 grade, the maturity is short, but the interest rate is high and the risk is low," adding, "Currently, institutional investors are so eager to buy that they cannot get enough."

In fact, the interest rate for Eugene Investment & Securities (A2+) issued on the 14th with a 3-month maturity was recorded at 7.3%, while SK (A1), issued under the same conditions on the same day, showed a significant difference at 5.1%. Especially for securities company CPs, demand is lower for small- and medium-sized non-bank securities firms. On the 13th, Hi Investment & Securities (A1) issued a 1-year maturity CP at 7.3%, but KB Securities (A1), issuing CP under the same conditions the next day, fixed the rate at 5.4%.

At least for PF ABCP, the overall interest rate level has somewhat decreased. In October, even though large construction companies provided guarantees, PF-related ABCP interest rates recorded double digits, but now they have dropped to single digits. Recently, in the secondary market, the 3-month 'K&Jeil 1st Series (A1)' purchased under a purchase commitment by Gyeongnam Bank was priced in the 7% range. The 'Kieun Sendong Daemun 2nd Series (A2+)', for which Lotte Construction bears a conditional debt assumption obligation, traded at an 8% interest rate.

[Image source=Yonhap News]

However, concerns about the PF ABCP market have not disappeared. According to the Korea Institute of Finance, the scale of PF ABCP that must be refinanced by February next year exceeds 29 trillion won. With the rapid decline in apartment prices and the increase in unsold properties, there are worries about the burden of working capital on construction companies and the potential chain shock to PF-linked financial companies. A PF industry insider said, "If the number of projects previously classified as normal but now classified as distressed increases, the liquidity shock in the PF ABCP market is likely to recur," adding, "The 'Wag the Dog' phenomenon, where the PF ABCP market damages the overall economy, could intensify."

Hyunjoo Lee, a researcher at Hyundai Motor Securities, advised, "If the downturn in the real estate market steepens further, it could again stimulate PF ABCP interest rates," adding, "With ongoing U.S. interest rate hikes and rising raw material costs, the uncertainty in the real estate market has not been resolved, so the government needs to make efforts to prevent the expansion of PF defaults."