Corporate Paper Interest Rates Rise Consecutively↑... Growing Concerns Over Short-Term Funding Market Tightening

The corporate paper (CP) interest rate, a representative short-term financing tool for companies, has been rising continuously recently, raising concerns about liquidity tightening in the short-term funding market.

According to the Korea Financial Investment Association on the 29th, the CP 91-day rate, which was 3.990% at the beginning of last month, recorded 4.290% as of the 27th of this month, rising about 30 basis points (1bp=0.01 percentage point) over the past two months.

In particular, the upward trend has been steep this month. Considering that October has many holidays such as the Chuseok holiday and Hangul Day, resulting in fewer business days, the CP rate has effectively increased by 1 to 2 basis points almost every single day.

In contrast, the 91-day negotiable certificate of deposit (CD), another ultra-short-term instrument, rose more than 10 basis points last month but has maintained 3.820% since the 6th of this month.

In the securities industry, it is believed that the CP rate had to rise as demand dried up due to securities firms' wrap accounts and specific money trusts (trusts) investing in CP being in a state of near closure.

According to the industry, most securities firms have used a 'maturity mismatch' strategy, incorporating and managing funds raised in bond-type wrap and trust accounts?short-term investment products?into long-term bonds and CP.

However, last year, bond prices plummeted due to rising interest rates and the default incident triggered by the Gangwon Legoland project, causing losses in bond-type wrap and trust accounts.

There were also allegations that some securities firms engaged in 'round-trip transactions' using two or more internal accounts, where one side sold funds and the other side bought them to offset losses.

The financial authorities have been investigating these unhealthy business practices since May, and the prolonged closure of wrap and trust accounts is said to have influenced the CP interest rate.

On the supply side, at the beginning of this month, as U.S. Treasury yields surged and corporate bond spreads (the interest rate difference between corporate bonds and government bonds) widened, companies turned to issuing CP, which has relatively lower interest rates, causing a supply-demand imbalance.

According to financial information provider Yonhap Infomax, CP net issuance amounted to 3.9884 trillion won in the second week of this month (October 9?13), the largest weekly net issuance amount this year.

For companies, the rise in CP interest rates means an increase in funding costs. With recent interest rate hikes making it difficult to raise funds through corporate bond issuance, an increase in short-term funding market rates further exacerbates corporate liquidity difficulties.

Additionally, the rise in CP and CD rates stimulates the interest rates on real estate project financing (PF)-asset-backed commercial paper (ABCP), which are priced with a spread over CP and CD rates. This could make refinancing maturing PF-ABCP volumes difficult and potentially cause short-term funding market tightening similar to last year.

PF-ABCP is a corporate paper typically with a three-month maturity, issued based on loan receivables to developers for PF project financing.

However, there are also forecasts that this upward trend will not persist until the end of the year.

Lee Chang-yong, Governor of the Bank of Korea, stated at a press conference following the Monetary Policy Committee meeting on the 19th, "The CP market is not a well-developed secondary market but mainly a primary issuance market with various issuers, so historically, market interest rates tend to rise with a lag. The rise in U.S. medium- and long-term bond yields is causing CP rates to follow."

He added, "Compared to last year, many issues such as Korea Electric Power Corporation and bank bond issuance have been resolved, so there is absolutely no situation where liquidity facilities need to be reactivated as liquidity support was provided last year."