[Funding Workaround] ① Large Corporations Flocking to the Commercial Paper Market... Issued 21.4 Trillion Won in Q1 Alone

Support from affiliates like Lotte and SK, increased funding demand due to performance decline
Funding channels for low-credit companies... Shortening of loan maturity structure

Editor's NoteThe sharp interest rate hikes that began after the Russia-Ukraine war have left corporate finance officers bewildered. Governments worldwide, including the United States, have made it difficult to predict how long and how much interest rates will continue to rise. Financial stability was shaken by the Legoland incident and fears of real estate project financing (PF) defaults, causing turmoil in the funding market. In this unstable market environment, not only companies with relatively low credit ratings but also high-quality large corporations sought alternative funding routes other than public corporate bonds, such as commercial paper (CP), private placement bonds, and bonds with warrants.

In the tightening funding market, commercial paper (CP) and electronic short-term bonds (STB), which are short-term funding instruments with maturities of less than one year, have become major funding sources for companies. According to the Korea Securities Depository on the 4th, the total amount of CP (including STB) issued by domestic non-financial corporations (excluding financial companies, associations, foundations, etc.) up to the end of the first quarter this year reached 21.4 trillion won. Including CP issued by financial companies such as securities firms, the outstanding domestic CP balance reached 145 trillion won. This is an increase of about 23 trillion won from 122 trillion won at the end of March last year, with net issuance excluding matured amounts during the same period being just over 2 trillion won.

When issuing short-term CP with maturities under one year, companies can omit complicated procedures such as submitting a securities registration statement. If a suitable broker (discount institution) and investor are secured, companies can borrow funds immediately after deducting interest in advance. In contrast, the shortening of loan maturities, where repayment dates come quickly, worsens a company's liquidity position. Due to this characteristic, CP has mainly been used as an alternative funding source to public corporate bonds by companies needing urgent cash or those having difficulty issuing corporate bonds stably.

Since the Beginning of the Year, Lotte Issued CP Worth 3.05 Trillion Won, SK Issued 3.049 Trillion Won

Among large conglomerate groups, Lotte Group's CP issuance stood out the most. Lotte Group issued a total of 3.05 trillion won worth of CP this year. By affiliate, Lotte Shopping issued the largest amount at 1.2 trillion won, followed by Lotte Holdings (803 billion won), Hotel Lotte (650 billion won), and Korea Seven (340 billion won).

The increase in Lotte Group's short-term funding was due to the need to secure liquidity for Lotte Chemical's rights offering and financial support for Lotte Construction. Early this year, Lotte Chemical conducted a 1.2 trillion won shareholder rights offering due to deteriorating performance and the acquisition of Iljin Materials. Major shareholders, including Lotte Holdings as the largest shareholder and Lotte Property & Development as the second-largest shareholder, participated in the rights offering. Additionally, Lotte Property & Development, Hotel Lotte, and Lotte Fine Chemical extended subordinated loans worth 600 billion won to a 1.5 trillion won fund established by Meritz Securities to support Lotte Construction's contingent liabilities.

Lotte Construction, which faced rumors of default due to concerns over contingent liabilities at construction sites, repaid 200 billion won worth of CP in full. Although about 300 billion won of CP matured, it was difficult to raise funds independently due to concerns over real estate PF. The concerns about Lotte Construction eased significantly as Lotte Group affiliates and Meritz Securities formed a fund to resolve PF contingent liabilities.

SK Group followed Lotte Group by issuing CP worth 3.049 trillion won. The holding company SK issued 1.045 trillion won, SK Telecom 900 billion won, and SK Innovation 400 billion won, with the three major affiliates' CP issuance exceeding 2 trillion won. After the Legoland incident tightened the funding market, SK Group issued CP on a large scale and has been repaying CP by issuing corporate bonds since the market stabilized earlier this year. However, due to deteriorating performance of affiliates such as SK Hynix, the group maintained an aggressive borrowing stance, issuing corporate bonds worth 5.174 trillion won in the first quarter alone.

LG Group (1.605 trillion won), CJ Group (1.585 trillion won), Hanwha Group (1.2162 trillion won), Shinsegae (1.251 trillion won), and Samsung Group (1.175 trillion won) each issued over 1 trillion won worth of CP in the first quarter. An investment banking industry insider explained, "Due to rising raw material prices and increased short-term operational funding burdens or greater interest rate volatility, companies waiting for interest rate stabilization to issue corporate bonds have frequently turned to the CP market."

A2-Rated Companies Choose CP Over Public Corporate Bonds

Companies with relatively lower credit ratings also actively used the CP market as an alternative funding source to public corporate bonds. Many CP issuances came from companies with short-term credit ratings one to three notches below the highest A1 rating, such as A2+, A2, and A2-.

Among A2+ rated companies, Shinsegae DF issued the most CP with 310 billion won in net issuance. LG Display (300 billion won), Netmarble (110 billion won), Hyosung TNC (150 billion won), and Korea Seven (80 billion won) also secured significant short-term liquidity through CP. Among A2 rated companies, Hyosung Advanced Materials (345 billion won) and Hite Jinro Holdings (260 billion won) had large CP issuance volumes. At the A3 rating level, Megabox Central issued CP to secure liquidity worth 99.7 billion won.

Hyosung Group is facing difficulties issuing public corporate bonds due to deteriorating performance of group affiliates. Early this year, Hyosung Chemical failed to attract institutional investor demand in a public corporate bond subscription, resulting in a full unsold issue. Although liquidity was secured with support from the Korea Development Bank, the possibility of issuing public corporate bonds remains uncertain. This is why Hyosung Advanced Materials and Hyosung TNC secured thousands of billions of won in liquidity through the CP market.

A corporate bond market insider said, "Low-credit companies burdened by deteriorating performance and potential credit rating downgrades find it difficult to issue corporate bonds and have no suitable alternative funding sources other than CP. While A2-rated companies, which offer attractive interest rates relative to their credit ratings, can secure liquidity in the CP market, companies rated A3 or lower continue to struggle even to secure short-term liquidity."

A credit rating agency official stated, "If companies with high borrowings increase CP issuance significantly, the shortening of debt maturity structure due to rapidly approaching repayment dates forces them to frequently raise funds. Excessive short-term funding can negatively impact credit ratings again, so efforts to extend debt maturities through corporate bonds and other means are necessary."