Polarization in the Corporate Bond Market... Only High-Grade Corporate Bonds Flourish

Concentration of High-Quality Bonds in the Primary Market
AAA·AA Increase by 178%·148%
A Decreases by 80%, BBB Not Issued

Government Policy Marginalizes Non-Investment Grade
Interest Rate Stabilization Expected to Take Time

[Asia Economy Reporter Minji Lee] Although concerns about the tightening of the corporate bond issuance market, which had frozen coldly after the outbreak of the novel coronavirus infection (COVID-19), are easing, it has been revealed that non-investment grade companies are still struggling to raise funds. While high-quality companies have recovered to pre-COVID-19 levels, companies with weak financial structures and non-investment grade ratings are still facing difficulties.

According to the 'Corporate Direct Financing Performance in April' data released by the Financial Supervisory Service on the 28th, corporate bonds issued through public offerings by general companies amounted to 4.22 trillion won, a 60.2% increase compared to the previous month (2.634 trillion won). This was largely due to the policy authorities' full-scale operation of the Bond Market Stabilization Fund (BMSF) since last month, which supplied liquidity to the previously dried-up issuance market.

Specifically, funds were raised mainly through high-quality corporate bonds in the issuance market. Looking at the issuance status of corporate bonds by credit rating, the issuance volume of non-investment grade corporate bonds actually decreased significantly compared to the previous month. During April, 500 billion won worth of unsecured general corporate bonds with the highest AAA rating were issued, an increase of 320 billion won (178%) compared to the previous month (180 billion won). Investment grade AA-rated corporate bonds also raised funds amounting to 3.53 trillion won, up about 148% from 2.11 trillion won in the previous month. Conversely, A-rated corporate bonds were issued at 190 billion won, down 80% from 940 billion won in March, and BBB-rated bonds were not issued at all.

The polarization phenomenon continues this month as well. From the 1st to the present, approximately 1.4826 trillion won of unsecured general corporate bonds with AAA rating have been issued, accounting for 22% of the total general corporate bond issuance volume of 6.6739 trillion won. A-rated bonds were issued at 172 billion won, representing only about 2% of the total. A- rated corporate bonds were issued at 343 billion won, and no bonds rated BBB+ or below were issued. This contrasts with the same period last year when A-rated bonds (425 billion won) accounted for 12% of the total issuance volume (3.562 trillion won). It also contrasts with the issuance of BBB+ (70 billion won) and BBB (168 billion won) rated bonds during the same period.

The continued polarization is due to government policies focusing mainly on some high-quality ratings. Since bonds were purchased mainly from companies with solid credit ratings (AA- and above) and non-negative business outlooks, non-investment grade corporate bonds were inevitably excluded from the issuance market.

The positive aspect is that active support for non-investment grade corporate bonds will begin from the end of this month. Starting next month, the BMSF plans to include 'fallen angels'?those downgraded to non-investment grade (A+) after April?as purchase targets. The financial authorities will issue 'COVID-19 Damage Response Primary Collateralized Bond Obligations (P-CBO)' and 'Key Industry P-CBO' from the 29th to support companies rated BB-. The Bank of Korea, together with the Korea Development Bank, will establish a Special Purpose Vehicle (SPV) to support low-credit corporate bonds.

However, it is expected to take some time before policy support leads to interest rate stabilization for non-investment grade corporate bonds. Kim Sang-man, a researcher at Hana Financial Investment, said, "As of the third week of May, it can be considered that the credit spread stabilization trend has been established," but added, "Given the clear gap between the highest rating and lower ratings, it is judged that market participants' perception of non-investment grade bonds has not yet improved." Lee Kyung-rok, a researcher at Mirae Asset Daewoo, said, "If the resurgence of COVID-19 becomes visible, credit spread volatility could increase further," and predicted, "Assuming the policy acts as a safety net and the economic recession due to COVID-19 continues, demand for medium- to short-term bonds focused on high-quality bonds will increase."

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