Polarization of Corporate Bonds Deepens Amid 'Corona Money Drought' (Comprehensive)

Bank Bonds Issued 9.38 Trillion Won in March
Market Revives, Taking a Breather

Other Financial Bonds Including Yeojeon Bonds
Drop Sharply from 2 Trillion Won in January to 430.4 Billion in February
Issued Amount Halved Again to 241 Billion in March
1.7 Trillion Maturing This Week Also a 'Burning Issue'

[Asia Economy Reporters Haeyoung Kwon and Minji Lee] Due to the impact of the novel coronavirus infection (COVID-19), a drought of funds has hit the bond market, causing polarization in the financial bond market. While bank bonds saw a surge in issuance last month, providing some relief, other financial bonds such as specialized credit finance company bonds (yeojeonchae) are facing a severe funding shortage. Bonds worth 1.7 trillion won maturing this week have become an urgent issue.

According to the Korea Financial Investment Association on the 6th, other financial bonds including yeojeonchae recorded a net issuance of 241 billion won in March. The issuance amount was 3.975 trillion won, and the redemption amount was 3.734 trillion won. When companies redeem maturing bonds with newly issued bonds, this refinancing activity is considered an indicator of their funding situation. The net issuance of other financial bonds sharply declined from 2.225 trillion won in January to 430.4 billion won in February, and then halved again in one month. Currently, companies are barely refinancing maturing bonds, making new issuance virtually impossible.

Specialized credit finance companies such as card companies and capital companies are rapidly drying up their funding sources as market conditions worsen due to COVID-19. Since yeojeonsa do not have deposit functions, they must raise funds through bonds, but demand for yeojeonchae has plummeted due to the high risk of defaults in loans to medium- and low-credit borrowers. To make matters worse, the government has ordered not only banks but also secondary financial institutions to grant principal and interest repayment deferrals and maturity extensions for small business owners, further worsening the funding difficulties. Bonds worth 1.695 trillion won in other financial bonds are maturing this week alone.

On the other hand, the bank bond issuance market is recovering. Bank bonds recorded a net issuance of 9.38 trillion won in March (issuance amount 18.31 trillion won, redemption amount 8.93 trillion won), a sharp increase compared to 5.5 billion won in January and 3.3 billion won in February. Although there was a temporary liquidity crunch due to COVID-19, the Bank of Korea included bank bonds in the unlimited repurchase agreement (RP) purchase program starting on the 16th of last month, which boosted issuance. Looking at bank bond net issuance last month, it was only 570 billion won until the 15th, but surged to 8.81 trillion won after the 16th.

Banks are expected to further increase bond issuance as they need to expand funding supply to small business owners and SMEs. Although the increase in short-term bonds with maturities under one year is a burden, the aversion to bank bonds has largely eased, making it possible for the market to absorb the supply.

The problem lies with yeojeonchae. The key issue is how much of yeojeonchae the 20 trillion won Bond Market Stabilization Fund (chaean fund) will include. Since funding difficulties may intensify mainly for small- and medium-sized card and capital companies, the scope and proportion of yeojeonchae included in the chaean fund are critical. Other financial bonds maturing this month amount to 3.9338 trillion won.

A financial industry official said, "During the 2008 global financial crisis, chaean fund money flowed mainly to card companies and high-quality capital companies, but it could not prevent restructuring of yeojeonsa," adding, "Since yeojeonsa cannot receive support at the financial holding company level, the chaean fund must expand its purchases of yeojeonchae."

Meanwhile, starting this week, IBK Asset Management, the lead manager of the 20 trillion won chaean fund, will begin purchasing bonds. The first tranche of 3 trillion won, received on the 1st as a capital call, was distributed to eight sub-managers who decided the purchase scale by bond type. The main purchase targets are high-quality bonds rated AA- or A1 and above, with maturities within three years. The sub-managers are divided as follows: corporate bonds (Korea Investment Trust Management, Samsung Asset Management), yeojeonchae (KB Asset Management, Hana UBS), bank bonds (NH-Amundi Asset Management, Eugene Asset Management), and commercial paper (CP) short-term bonds (Multi Asset, Shinhan BNP).

The operation of the chaean fund is expected to reduce the unsold corporate bond burden for issuers. In particular, by covering about 50% of refinancing volume, some of the 6.5495 trillion won worth of corporate bonds maturing in April are expected to see refinancing pressure eased. However, concerns remain that the market atmosphere may not fully recover due to the ongoing impact of COVID-19 and companies’ credit rating downgrades.

Kim Eun-gi, a researcher at Samsung Securities, explained, "To reduce unsold burdens, corporate bonds with AA or higher ratings and three-year maturities that fit the chaean fund’s investment criteria will be issued," adding, "For long-term bonds over five years, issuers must rely entirely on market demand, so companies planning to issue corporate bonds this month are shortening maturities to two to three years."

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