[Why&Next] Construction Bonds Sold Out Again... A 'Relief' for Construction Companies' Liquidity

SK Ecoplant Draws Over Six Times the Target Amount in Orders
HL D&I Hanra Succeeds After 'No Bids' Nightmare
Temporary Recovery or Long-Term Rebound? Cautious Views Persist
Hyundai Construction Faces 330 Billion KRW Bond Maturity... Market Watches Closely

Investment sentiment toward construction bonds, which had frozen due to last year's workout of Taeyoung Construction and this year's filing for rehabilitation procedures (formerly court receivership) by Shindongah Construction, is improving. Two construction companies that issued corporate bonds this year have consecutively succeeded in 'selling out.' For construction companies struggling with liquidity tightening and difficulties in fundraising, this is like 'rain in a drought.'

According to the investment banking (IB) industry on the 11th, SK Ecoplant succeeded in attracting a total of 988 billion KRW in purchase orders during a 150 billion KRW corporate bond demand forecast held the previous day. This is more than six times the amount of the funds raised. Earlier, HL D&I Hanra, which was the first in the industry to issue corporate bonds this year in January, received orders exceeding twice the amount for its 71 billion KRW bond issuance, totaling 156 billion KRW.

Two Construction Companies That Succeeded in 'Selling Out' Show Better Reception Than 1-2 Years Ago

Initially, SK Ecoplant considered the deteriorated investment sentiment toward construction bonds and set the public offering interest rate band up to 1.5 percentage points higher than the individual average market rate. However, due to competitive buying by institutions, the actual subscription rates were determined at a better level than expected: 1-year bond -13bp (1bp=0.01 percentage point), 1.5-year bond +5bp, 2-year bond -10bp, respectively. Based on the results of this demand forecast, SK Ecoplant is also considering increasing the issuance up to 300 billion KRW. In 2023, SK Ecoplant's corporate bond issuance attracted 435 billion KRW, about four times the 100 billion KRW offered. In terms of order volume relative to the amount raised, the atmosphere is better than two years ago.

HL D&I Hanra, the first construction bond issuer this year, recorded an 'overbooking' with orders exceeding the offering amount despite being a non-investment grade construction bond rated BBB+. Notably, this company experienced the shock of 'no bids' when it attempted to issue corporate bonds a year ago without securing a single order. The success in this issuance is analyzed to be due to the effective high-interest rate strategy set at 6.8-7.8% for 1-year bonds and 7.1-8.1% for 1.5-year bonds. Encouraged by the successful demand forecast, HL D&I Hanra increased its bond issuance from 71 billion KRW to 81 billion KRW.

Is It Just a 'Flash' or Not... Attention Turns to Hyundai Construction

While the possibility of a rebound in the construction bond market is being discussed, cautious views remain prevalent that the recovery in investment sentiment is likely to be short-term. It is said that construction bonds also benefited from the 'early-year effect,' where institutions actively disbursed funds after newly setting investment limits at the beginning of the year. In fact, the overall corporate bond market has been strong this year due to expectations of additional interest rate cuts by the Bank of Korea and increased demand for safe assets. In a recent report, Korea Ratings stated, "The construction industry still faces credit burdens due to the real estate market slump and project financing (PF) risks," adding, "Investment sentiment toward construction bonds will vary significantly depending on the timing of future interest rate cuts and economic recovery."

Market attention is now focused on Hyundai Construction, which has a corporate bond maturity of 330 billion KRW due in February. Hyundai Construction is traditionally the highest credit-rated company in the industry. However, risks were highlighted after recording an operating loss of about 1.2 trillion KRW last year. If Hyundai Construction continues the successful streak in construction bond issuance, the industry atmosphere is expected to turn around. According to the Korea Financial Investment Association, the total amount of corporate bonds that the top 30 construction companies by construction capability evaluation must repay within this year reaches 3.81 trillion KRW. Some speculate that Hyundai Construction might choose cash repayment instead of refinancing issuance.