[Funding Workaround] ② Companies Struggling to Issue Public Bonds Rely on Private Bonds

Issued 4.3 Trillion Won Worth in Q1
Liquidity Channel for BBB-rated Companies and Mid-sized Construction Firms
If General Private Bonds Are Not Possible, Then Convertible Bonds

Editor's NoteSince the Russia-Ukraine war, the sharp interest rate hikes have left corporate finance officers bewildered. Governments worldwide, including the United States, have maintained an unpredictable stance on how long and how much they will raise rates. Financial stability was shaken amid 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 option bonds.

Companies facing difficulties issuing public corporate bonds due to credit issues secured necessary liquidity through the CP market and private placement bond market. Construction companies, burdened by worsening real estate conditions and concerns over PF defaults, particularly issued many private placement bonds.

Private placement bonds can be issued by negotiating terms with institutional investors or securities firms when there is market demand, without submitting securities registration statements or conducting demand forecasts for institutional investors. Therefore, companies that want to avoid public corporate bond procedures or find it difficult to attract institutional investors issue bonds by individually seeking investment demand. Even high-credit large corporations sometimes issue small amounts when investors offer favorable interest rate conditions.

Funding Methods for Companies with Credit Concerns like Taeyoung

According to the Korea Securities Depository on the 4th, domestic companies issued a total of 4.314 trillion KRW worth of private placement bonds (excluding equity-type bonds and securitized bonds) in the first quarter (January to March) of this year. General private placement bonds and option bonds each accounted for about half of the total issuance. Option bonds are bonds with conditions such as call options (issuer's early redemption right) and put options (investor's early redemption claim right) agreed upon with investors.

Among groups, Taeyoung Group had the largest volume of private placement bond issuance. At the beginning of the year, TY Holdings issued 400 billion KRW worth of private placement bonds to global private equity firm Kohlberg Kravis Roberts (KKR) as an investor. This was to support Taeyoung Construction, which faced bankruptcy rumors due to PF default concerns. The issued private placement bonds have a maturity of four years, with TY Holdings able to exercise the call option starting two years after issuance.

Taeyoung Construction, enabled to issue bonds with funding support from TY Holdings, additionally issued 160 billion KRW worth of private placement bonds to secure liquidity. Taeyoung Construction issued 100 billion KRW of general private placement bonds and 60 billion KRW of call option private placement bonds.

LG Group issued 385 billion KRW worth of private placement bonds. LG Display, which faced difficulties issuing public bonds due to large deficits, issued 337 billion KRW worth of private placement bonds in the first quarter alone. Among LG Group's major affiliates, Palmhanong, with a lower credit rating (A), issued 50 billion KRW worth of private placement bonds to raise funds. Most of LG Group's high-quality affiliates such as LG Electronics, LG Chem, LG CNS, and LG Innotek secured liquidity through public corporate bonds.

BBB-rated companies (BBB+ to BBB-) that find it difficult to issue public bonds consecutively issued small-scale private placement bonds under 100 billion KRW. Companies such as IS Dongseo (70 billion KRW), Doosan Enerbility (70 billion KRW), AJ Networks (34 billion KRW), and LS Networks (30 billion KRW) raised funds for debt repayment or operating capital through private placement bonds.

An investment banking (IB) industry official said, "Public bonds are issued by publicly soliciting investors through interest rate bidding, whereas private placement bonds are issued by negotiating terms with institutional investors seeking high interest rates, so overall interest rates tend to be higher," adding, "They are widely used as alternative funding sources for companies that find it difficult to issue public bonds."

Mid-sized Construction Companies Issue Many Option Bonds

Companies that find it difficult to issue private placement bonds secured liquidity through option bonds. Option bond issuance was particularly common among construction companies.

Taeyoung Construction issued a total of 60 billion KRW in option bonds in two installments last month. These bonds allow Taeyoung Construction to exercise a call option and redeem early before maturity. Dongbu Construction issued six-month maturity put option bonds twice last month under the management of NH Investment & Securities. Unlike bonds with call options, if investors request early redemption before maturity, the issuer must repay immediately.

KCC Construction issued 20 billion KRW worth of call option bonds under the management of Kiwoom Securities. The maturity is three years, but the call option can be exercised six months after issuance for early redemption. Shinsegae Construction issued option bonds under the management of Yuanta Securities, structured similarly to KCC Construction's option bonds.

Among large corporate affiliates, Hyosung Chemical, which failed to attract investors for public corporate bonds, secured liquidity by issuing 30 billion KRW worth of option bonds. These bonds, managed by Woori Investment & Securities, have a three-year maturity with call options exercisable six months after issuance. Nexen Tire also issued 70 billion KRW worth of private placement bonds with the same conditions but different interest rates. SK Plasma, a manufacturer and seller of blood products (medicines made from human blood), issued 10 billion KRW worth of put option bonds under the management of SK Securities.

NongHyup Life Insurance, Hana Alternative Asset Management, and Fubon Hyundai Life Insurance privately issued 250 billion KRW, 100 billion KRW, and 60 billion KRW worth of hybrid capital securities, respectively. Hybrid capital securities are perpetual bonds with a 30-year maturity and call options, mainly issued by financial companies to improve capital adequacy ratios.

A bond market official explained, "Call options are the issuer's rights, and put options are the investor's rights, so the interest rates on option bonds vary depending on the option type," adding, "However, since most issuing companies find it difficult to issue general bonds, the interest rates on most option bonds are set at quite high levels." The official also evaluated, "Although call options seem long-term, issuers often have to exercise them, making them effectively similar to short-term funding."