[Funding] LG Group Affiliates Issue Consecutive Bonds with 1% Interest Rates

[Asia Economy Reporter Lim Jeong-su] LG Group affiliates are attracting attention by successfully issuing corporate bonds at ultra-low interest rates in the 1% range one after another. Despite concerns over liquidity crunch due to the spread of the novel coronavirus infection (COVID-19), investment demand for companies with excellent credit ratings is evaluated to be steady.

According to the investment banking (IB) industry on the 21st, LG Innotek recently issued private placement corporate bonds worth 50 billion KRW under the management of Mirae Asset Daewoo. The bond maturities are 5 and 7 years, with interest rates set at 1.99% and 2.29%, respectively. This is the lowest interest rate among LG Innotek’s borrowings with maturities of 5 years or longer. It is known that Mirae Asset Daewoo purchased all of LG Innotek’s private bonds and then sold them to institutional investors.

The interest rate on LG Innotek’s private placement bonds is the lowest among existing borrowing costs. Currently, the interest rates for 5 to 10-year corporate bonds that have not matured and remain outstanding are formed in the 2% to 4% range. Also, the interest rates on borrowings from Korea Development Bank, Export-Import Bank of Korea, Industrial and Commercial Bank of China, and Woori Bank Hong Kong for facility and operating funds are mostly in the 2% to 4% range.

LG CNS, another affiliate of the same group, also issued 300 billion KRW worth of 3, 5, and 7-year corporate bonds all at interest rates in the 1% range. Unlike LG Innotek’s private placement, LG CNS’s interest rates were determined through a public offering process (institutional demand forecast). Its credit rating is AA+, two notches higher, and the issuance interest rates are not much different from Hyundai Motor’s corporate bonds (5-year 1.81%, 7-year 1.92%).

This is because the Bank of Korea’s base rate cuts have pushed yields on government bonds and AA-rated or higher corporate bonds to the bottom, leading investment demand to flock to relatively higher-yielding and stable AA- rated corporate bonds. An IB industry official said, "Since the spread of COVID-19, institutional investors’ liquidity has flowed into relatively low-risk AA-rated long-term corporate bonds," adding, "There is a clear gap in funding costs between high-quality and non-high-quality companies around the AA- rating threshold."

Improvement in the performance and financial structure of the group’s electronics affiliates also positively contributed to lowering funding costs.

LG Innotek’s sales and operating profit increased significantly in the first quarter of this year. Despite deteriorating performance in automotive components, the optical solutions division’s performance improved, resulting in total sales of about 2.01 trillion KRW in Q1 this year, an increase of 640 billion KRW compared to Q1 last year. EBITDA also rose from 130 billion KRW to 300 billion KRW during the same period. Net borrowings decreased from 1.51 trillion KRW to 1.17 trillion KRW, improving the financial situation. LG CNS also saw slight improvements in sales and profitability and a reduction in borrowings.

An industry insider predicted, "Among LG Group affiliates, funding costs for companies with deteriorating credit ratings such as LG Chem and LG Display will gradually increase."

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