Corporate Bond Financing Still Burdensome... Transport, Aviation, and Energy Sectors Hit Hard

Bank of Korea "Possibility of Further Deterioration in Funding Conditions... Monitoring Needed"

Korean Corporate Bond AA- Rating (3-Year) Spread Trend (Source: Bloomberg)

[Asia Economy Reporter Kim Eun-byeol] Although financial market instability caused by the novel coronavirus disease (COVID-19) has somewhat eased, the burden on companies raising funds through corporate bonds continues to increase steadily. The funding burden has become particularly heavy in sectors affected by the spread of COVID-19 and the sharp drop in international oil prices, such as aviation, transportation, and energy.

According to Bloomberg on the 15th, the spread between Korea’s AA- rated corporate bonds (3-year maturity) and 3-year government bonds widened to 77 basis points (bp) (1bp = 0.01 percentage points) as of the 12th. The AA- rated corporate bond spread was around 40bp at the end of January. After surging to about 74bp in early April, it has continued to rise.

The spread for Korea’s A- rated corporate bonds (3-year maturity) also increased to around 167bp. The A- rated corporate bond spread rose by more than 30bp from about 130bp in January.

Corporate bond spreads showed a sharp increase until mid-April, and although the recent rate of increase has slowed, the upward trend remains. The corporate bond spread refers to the interest rate difference between government bonds and corporate bonds. A higher spread indicates a greater funding burden for companies.

Among companies, the corporate bond spread for the aviation and transportation sector widened to 72bp (compared to the end of last year as of late April), and the spread for perpetual bonds was also high at 43bp. Energy companies also faced a significant burden with a spread of 34bp.

Recently, the corporate bond issuance market itself has shown a more relaxed atmosphere compared to the early stages of the COVID-19 outbreak. According to the Bank of Korea’s Monetary and Credit Policy Report, corporate bond issuance last month amounted to 6.1 trillion won, increasing compared to March (2.7 trillion won) and April (4.5 trillion won), recovering to the level of February. The problem is that non-investment grade companies still find it difficult to raise funds. Among last month’s corporate bond issuance, 82.0% were investment grade, while non-investment grade accounted for 18.0%. This is significantly lower than the 23.1% share of non-investment grade issuance in January.

The business community is demanding the prompt establishment of a special purpose vehicle (SPV) that purchases corporate bonds, commercial papers (CP), and short-term bonds, including those with low credit ratings, as companies issuing non-investment grade corporate bonds face a heavy burden.

The Korea Chamber of Commerce and Industry stated, "Measures such as the Bond Market Stabilization Fund and support for issuing project bonds backed by corporate bonds (P-CBO) target investment-grade companies, so the non-investment grade corporate bond market remains difficult. Since many companies in key industries such as shipbuilding, aviation, and shipping are in the low credit rating corporate bond market, it is crucial to speed up the expansion of support to include low credit ratings."

The government prepared an SPV establishment plan last month to alleviate the funding difficulties of low credit rating companies. However, measures necessary for securing SPV funding have not yet been implemented, making the timing of the SPV’s launch and operation uncertain. The failure to properly review the third supplementary budget bill in the National Assembly is also a reason for the delay in establishing the SPV.

Non-investment grade corporate bonds maturing this year are concentrated in June and September, accounting for 53% (2.5 trillion won), and in June, companies’ demand for settlement funds at the end of the first half and financial institutions’ quarter-end soundness evaluations are also scheduled.

The Bank of Korea stated in its report, "If the COVID-19 crisis prolongs and corporate performance deteriorates further, funding conditions may worsen again. Although the deterioration in funding conditions this time was not as severe compared to major countries such as the United States, it is necessary to strengthen monitoring of the issuance status of credit securities such as corporate bonds, lending attitudes of financial institutions, and companies’ liquidity conditions."

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