Utilized as an Alternative Funding Source Amid Rising Market Interest Rates
Impact of Corporate Bond Issuance Failure Due to Securities Registration Statement Errors
Hyundai Heavy Industries Group affiliates have consecutively raised funds through loan securitization. This is interpreted as a choice of loan methods instead of corporate bond issuance due to a sharp rise in corporate bond issuance rates caused by the increase in market interest rates.
According to the investment banking (IB) industry, HD Hyundai Oilbank raised 170 billion KRW through a loan securitization led by Hana Bank. A special purpose company (SPC) established by Hana Bank lends to Hyundai Oilbank, and the SPC holding the loan assets issues short-term asset-backed commercial paper (ABCP) with a 3-month maturity, refinancing it for three years. When HD Hyundai Oilbank repays the loan principal and interest to the SPC, the SPC pays the ABCP principal and interest to investors.
HD Hyundai, the holding company of Hyundai Heavy Industries Group, also raised 70 billion KRW using the same method. In HD Hyundai's case, Shinhan Bank led the funding support. It is known that both Shinhan Bank and Hana Bank acquired ABCP issued by Hyundai Heavy Industries Group affiliates using their own securities finance accounts.
HD Hyundai and HD Hyundai Oilbank have mainly issued corporate bonds, which have the lowest funding costs, to refinance and raise operating funds. However, as interest rates have risen, they appear to have sought alternative funding methods due to the increasing burden. Recently, Hanon Systems also secured 80 billion KRW in liquidity using the same method as Hyundai Heavy Industries affiliates.
An IB industry official said, "The interest rate for 3-year corporate bonds issued by companies with a credit rating of AA- has recently risen to the mid-4% range, and for A-rated companies, it is in the high 4% range," adding, "Recently, there has been an increase in cases where companies raise funds through bank loans, which have relatively better interest rate merits, due to the high corporate bond interest rates."
It also seems that HD Hyundai Oilbank's failure to raise funds by issuing corporate bonds due to an error in the securities registration statement influenced the shift to loans. In June, HD Hyundai Oilbank conducted a demand forecast to issue 100 billion KRW in corporate bonds. With institutional investor demand reaching 875 billion KRW, they planned to increase the issuance by 200 billion KRW. However, some corporate bond issuance was canceled due to an interest rate entry error in the securities registration statement.
An IB industry official said, "Bank loans have the advantage of being simpler in the funding process than corporate bonds because they do not require submission of securities registration statements or demand forecasts," adding, "If loan interest rates are similar to corporate bond issuance rates, companies are likely to avoid corporate bonds." However, the official added, "From a financial strategy perspective, it is necessary to continuously issue corporate bonds to build credit in the bond market."
There is also a forecast that if interest rates stabilize and decline in the fourth quarter, companies will prefer corporate bond issuance over loans again. A corporate bond market official said, "Although temporary interest rate merits for loans may arise due to recent high interest rate volatility, once the volatility decreases and stabilizes, the normal situation where corporate bond rates are much lower than loan rates will be restored."
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