Even Blue-Chip Companies Face Funding Emergencies

Investment Sentiment Weakens Without Corporate Bond Issuance
Posco Affiliate PosPower Also Faces Undersubscription

[Asia Economy Reporter Minji Lee] The COVID-19 pandemic has triggered an emergency in securing liquidity for companies. As concerns over an economic recession grow, companies are not only refraining from issuing corporate bonds but investment sentiment has also sharply contracted. The market expects that the low interest rate and low growth trend will likely continue for a long time, leading to a persistent tightening of the corporate bond market.

According to the investment banking (IB) industry on the 18th, the total number of public corporate bonds issued by companies this month until that day was only 13, with an issuance amount of 2.7 trillion KRW. This is about half compared to the 4.1 trillion KRW (28 cases) of public corporate bonds issued during the same period last year.

In particular, warning signs are being detected as even high-grade corporate bonds are not being issued as planned in the corporate bond issuance market. PosPower, an affiliate of the POSCO Group, confirmed demand for only 40 billion KRW out of the 50 billion KRW in a pre-subscription for a 3-year maturity corporate bond issued the previous day, resulting in a shortfall of 10 billion KRW. Hana Bank, rated AA, which issued corporate bonds this month, raised only 270 billion KRW out of the 300 billion KRW sought for subordinated bonds. Kiwoom Capital (BBB+) also raised only 17 billion KRW out of the 50 billion KRW target.

An IB industry official explained, "Due to large interest rate fluctuations, institutions find it difficult to respond to the lowered rates, and with future corporate performance uncertain, a wait-and-see stance has deepened. Institutions are choosing to invest in more stable government bonds or hold cash rather than investing in corporate bonds."

It is analyzed that the contraction in the secondary market, caused by growing concerns over corporate performance due to the spread of COVID-19, is affecting the primary issuance market as well. Some institutions have already started actively managing risks by selling corporate bonds with credit downgrade concerns amid growing recession fears. Accordingly, experts point out the need for active roles by financial authorities to prevent a sharp freeze in the corporate bond market.

Lee Tae-hoon, a bond researcher at Ebest Investment & Securities, said, "Corporate bonds are vulnerable to liquidity issues, and the negative impact in the secondary market has spread to the perpetual bonds and corporate bond issuance market, making it difficult to predict when the market will ease. The financial authorities should reduce volatility in the bond market by, for example, using the Bond Market Stabilization Fund (ChaAn Fund) to purchase non-investment grade bonds and revive investment sentiment."

The ChaAn Fund was created to support liquidity for companies facing funding difficulties due to bond market tightening and to resolve excessive interest rate gaps between government bonds and corporate bonds. The day before, financial authorities announced that they are reviewing market stabilization measures such as the ChaAn Fund, project collateralized bond obligations (P-CBO), and the Financial Stability Fund to stabilize the issuance market.

Kim Pil-su, a research fellow at the Capital Market Institute, emphasized, "During the 2008 financial crisis, the ChaAn Fund reduced refinancing risks for companies by purchasing more than half of the volume and even achieved an 18% return. In the current market, financial authorities need to directly intervene and provide capital injections to companies at risk of default sector by sector."

This content was produced with the assistance of AI translation services.