Interest Rates Rising Relentlessly... Companies Cautious About Issuing Corporate Bonds

Concerns Over Domestic PF Defaults Amid Central Real Estate Crisis... Government Bond Yields Hit Yearly High
Trend to Delay Corporate Bond Issuance... Signs of Renewed Interest Rate Polarization

As the chain default crisis of Chinese real estate companies and the possibility of prolonged tightening in the United States push market interest rates higher, the funding burden on companies is gradually increasing. Companies that temporarily halted corporate bond issuance during the first half-year settlement and vacation period are still tensing up amid interest rate volatility well past mid-August.

According to the securities industry on the 18th, the yield on the U.S. 10-year Treasury bond briefly surged to 4.328%, the highest level since 2008, in the New York bond market the previous day. Although there are expectations that the U.S. Federal Reserve (Fed) is nearing the end of its rate hike cycle, the fact that many Federal Open Market Committee (FOMC) members still advocate for additional hikes is believed to have influenced the interest rates. The growing instability in the credit market, including global credit rating agency Fitch downgrading the U.S. sovereign credit rating and issuing warnings about downgrades of major U.S. banks’ credit ratings, also contributed to the rise in interest rates.

Along with U.S. rate concerns, worries about the Chinese real estate crisis have increased in Asian capital markets, causing domestic interest rate volatility to rise as well. The yield on the Korean 3-year government bond approached 3.80%, and the 10-year Treasury bond yield is poised to exceed 4%. The 10-year yield even briefly surpassed 3.9% the previous day, marking a yearly high.

As interest rate volatility increases, companies that need to raise funds by issuing corporate bonds are also becoming more anxious. Corporate bond issuance rates are determined by adding a credit spread, which depends on the company’s credit rating, to the government bond yield of the same maturity. Recently, with government bond yields rising alongside signs of credit spreads increasing, companies’ funding burdens are growing.

The 3-year unsecured corporate bond yield for companies with an AA credit rating moved around 4% during May and June this year but has recently risen to the mid-4% range. The 3-year corporate bond yield for A-rated companies, which was around 5%, has also climbed to the mid-5% range. Reflecting the recent domestic and international interest rate increases, the actual corporate bond funding rates are expected to be even higher. If the trend continues, there are forecasts that the corporate bond funding rate for AA-rated companies will approach 5%.

Due to the increased interest rate burden, companies are also observed to be more cautious about raising funds. Public corporate bond issuance, which sharply declined during the summer vacation period, has continued to remain subdued in August. Up to this day in August, there has been only one public corporate bond demand forecast, conducted by Dongwon F&B. SK Siltron, Lotte Chemical, POSCO International, and Hyundai Rotem are scheduled to conduct demand forecasts in late August, but the volume is significantly reduced compared to previous years.

An investment banking (IB) industry official said, "Due to the Chinese real estate crisis and other factors, the upward trend in interest rates is inevitable for the time being," adding, "Companies are closely monitoring the interest rate situation and increasingly delaying the timing of corporate bond issuance." The official also predicted, "The subdued atmosphere in the corporate bond issuance market, caused by the vacation period and half-year settlement, is likely to continue for some time."

The polarization of interest rates between high-quality and lower-quality companies is also expected to deepen. This is because the interest rate gap between AA-rated companies and those rated A or below is widening. An IB industry official expressed concern, saying, "With credit issues resurfacing such as the chain defaults of Chinese real estate companies and domestic project financing (PF) failures, the polarization of funding rates and investment demand between high-quality and lower-quality companies could intensify."