Avoidance of Public Bond Issuance Amid Rising Market Interest Rates
Securing Private Investment Demand Through Affiliates and Securities Firms
Companies such as Hanjin KAL, AJ Networks, and Hansol Technics are raising funds by issuing small-scale private corporate bonds (private bonds) instead of public bonds. This is due to the deterioration of the public bond issuance environment for low-credit companies, as investor sentiment in the bond market has worsened with recent interest rate increases.
According to the investment banking (IB) industry on the 23rd, Hansol Technics (BBB+) issued private bonds worth 10 billion KRW underwritten by Kiwoom Securities. The maturity is 1 year and 6 months, with an interest rate set at 3.99% per annum. This is a relatively low interest rate level for BBB+ rated bonds.
AJ Networks (BBB+), which holds the same rating, issued private bonds worth 12 billion KRW and 10 billion KRW with maturities of 1 year and 2 months and 1 year and 6 months, respectively, on the 18th. Shin Young Securities and Hanyang Securities participated as underwriters and purchased the bonds, with interest rates set at 5.10% and 5.30% per annum by maturity. They successfully secured a total liquidity of 22 billion KRW at an interest rate level in the low 5% range.
Earlier, on the 17th, Hanjin KAL, the holding company of the Hanjin Group, secured a total of 30 billion KRW through private bond issuance. They issued 16 billion KRW worth of 1 year and 6 months maturity bonds at an interest rate of 3.90% per annum, and 2-year maturity private bonds at an interest rate of 4.10% per annum. Reflecting the recovery in air travel demand for Korean Air, the interest rates were set at a considerably low level despite the BBB+ rating.
This contrasts with BBB-grade (including BBB+, BBB, BBB-) companies that lined up in the public bond market in the first quarter of this year. Public bonds go through processes such as securities registration submission, demand forecasting (bidding), and subscription, with interest rates determined by market principles. Private bonds, however, do not undergo demand forecasting for price determination and instead negotiate interest rates directly with bond purchasers.
In this situation, the recent rise in market interest rates has dampened investor sentiment toward companies with relatively high risk and low credit ratings. If these companies enter the public bond market, there is a high possibility that investors will not participate in demand forecasting, resulting in bond under-allocation or failure to sell.
Under these circumstances, a paradoxical phenomenon has occurred where private bond interest rates are lower than those of public bonds. The average interest rate for 1 year and 6 months maturity BBB+ rated corporate bonds, as evaluated by bond rating agencies, exceeds 5%. Some BBB+ companies are even evaluated at levels higher than 7%.
Despite rising interest rates, companies like Hanjin KAL and AJ Networks have succeeded in raising funds at interest rates around 4-5%. This is interpreted as some institutional investors showing willingness to purchase bonds even at lower interest rates, enabling the issuance of private bonds by leveraging this demand.
An IB industry official stated, "BBB-grade companies are avoiding the public bond market and issuing private bonds because institutional investors such as securities firms with whom they have regular trading relationships or group affiliates are willing to purchase private bonds even at somewhat lower interest rates."
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