BBB-grade Non-Investment Companies, Public Corporate Bonds Success Relay

High Interest Rates and Short Maturities
Institutional Funds Chasing High Returns Inflow
AJ Networks Places 99 Billion Won Buy Orders
SLL Jungang Raises 76 Billion Won Funds
Doosan Fuel Cell and Others Issue Bonds

Non-investment grade companies with a credit rating of BBB (credit ratings BBB+, BBB, BBB-) are consecutively succeeding in issuing public corporate bonds. Although BBB-rated bonds are low-credit, non-investment grade bonds, they are attracting many institutional investors seeking short-term high returns due to their high interest rates and short maturities.

According to the investment banking (IB) industry on the 30th, AJ Networks (credit rating BBB) received purchase orders worth 99 billion KRW during a 30 billion KRW corporate bond demand forecast (bidding) conducted the previous day under the management of Eugene Investment & Securities. For the 1-year maturity bonds (1-year bonds) with a 10 billion KRW issuance, 50 billion KRW in purchase funds were received, and for the 2-year bonds with a 20 billion KRW issuance, 49 billion KRW was received.

Thanks to the overwhelming orders, the issuance interest rate was able to be lowered significantly more than expected. AJ Networks proposed a desired interest rate range of -30bp to +30bp (1bp = 0.01 percentage points) relative to the average evaluation rate (Minpyeong rate) from private bond rating agencies. As a result of the bidding, both the 1-year and 2-year bonds were fully subscribed at Minpyeong rate minus 90bp. AJ Networks is reportedly planning to increase the corporate bond issuance to 50 billion KRW considering the purchase order volume.

Earlier, SLL Jungang, also BBB-rated, successfully completed its corporate bond demand forecast with 76 billion KRW in funds received against a 50 billion KRW issuance. SLL Jungang conducted the demand forecast under the management of NH Investment & Securities and Shinhan Financial Investment, proposing fixed interest rates of 6.00~7.00% for 1-year bonds and 6.60~7.60% for 2-year bonds as the public offering desired rates. Orders of 21 billion KRW and 55 billion KRW were received for each maturity, respectively. Reflecting the demand forecast results, the issuance interest rates were set at 7.0% for 1-year bonds and 7.29% for 3-year bonds.

With institutional funds pouring into BBB-rated non-investment grade bonds, Doosan Fuel Cell also proceeded with a public corporate bond issuance. Doosan Fuel Cell plans to issue 40 billion KRW worth of 2-year maturity corporate bonds and is conducting a demand forecast on the day. An IB industry official said, "Doosan Fuel Cell is a company expected to have stable growth in the fuel cell business sector, which is the future growth engine of the Doosan Group," adding, "Although it is a non-investment grade bond, there should be no significant difficulty in raising investment funds given the current bond market atmosphere."

The popularity of BBB-rated bonds is attributed to their high interest rates. Both AJ Networks and SLL Jungang, which previously conducted corporate bond demand forecasts, set issuance interest rates around 7%. Considering that AA and A-rated bonds have rates around 3~5%, this is about 2 percentage points higher. Despite the high interest rates, the short maturities of 1 to 2 years mean the likelihood of bond default within the term is also considered low.

An IB industry official stated, "In the bond retail market, individual investors are also actively seeking high-interest BBB-rated bonds," and added, "Asset management companies are increasing the size of high-yield funds as companies like Toss (Viva Republica) participate in large-scale initial public offerings (IPOs) to be allocated public shares, which is driving up demand for BBB-rated bonds." Under current law, high-yield funds can receive a preferential allocation of 5% of IPO public share volumes. For KOSDAQ listings, the preferential allocation rate has been raised to 10% of public shares and has been applied since this year.

Meanwhile, Hanjin (credit rating BBB+), a logistics company affiliated with the Hanjin Group, recently issued 46 billion KRW worth of bonds through a private placement instead of public corporate bonds, which require procedures such as demand forecasts.