COVID-19 Triggered Corporate 'Binikbin Buikbu'... Worse Than During the Financial Crisis

The Spread Gap Between Investment-Grade and Non-Investment-Grade Corporate Bonds Widens Beyond Financial Crisis Levels
Large Corporations Can Raise Funds at Low Interest Rates
But Non-Investment-Grade Bond Issuers Still Face Difficulties

Most Corporate Loans Go to SMEs
Supporting SMEs Forever Is Difficult... Financial Sector's Caution Also Rising

[Asia Economy Reporter Kim Eun-byeol] As the novel coronavirus infection (COVID-19) crisis prolongs, a 'rich get richer, poor get poorer' phenomenon is emerging among companies. Large corporations and high-quality companies can smoothly raise funds in the bond market and easily obtain low-interest loans, whereas non-investment grade and small-to-medium enterprises (SMEs) are increasingly forced to borrow money at high costs just to survive.

According to the Bank of Korea and the Korea Financial Investment Association on the 11th, since the corporate bond market began stabilizing in June, credit spreads between high-quality and non-investment grade bonds have shown a differentiated pattern. While the bond market was shaken uniformly in the early stages of COVID-19, it has since shown decoupling depending on corporate bond ratings.

The Gap Between High-Quality and Non-Investment Grade Corporate Bonds Widens More Than During the Financial Crisis

The credit spread of high-quality corporate bonds (AA- rating) compared to 3-year government bonds narrowed from 76 basis points (bp, 1bp=0.01 percentage point) on May 29 to 60bp on the 2nd of this month. Meanwhile, the spread for non-investment grade bonds (A- rating) remains high, moving only slightly from 164bp to 163bp during the same period.

While high-quality corporate bonds have benefited from bond market stabilization and policy rate cuts, non-investment grade bonds have experienced slower recovery.

The spread gap between high-quality and non-investment grade corporate bonds is now wider than during the financial crisis. In September 2008, the 3-year government bond yield was 5.66%, the 3-year corporate bond yield (AA-) was 7.19%, and the A- rated bonds were around 7.5%. The difference between non-investment grade and high-quality corporate bond yields was only about 31bp.

However, as of the 9th, the 3-year government bond yield is 0.92%, AA- rated bonds are at 1.52%, and A- rated bonds at 2.55%, widening the yield gap between high-quality and non-investment grade corporate bonds to nearly 1 percentage point. The yield difference is even more severe for lower-rated BBB+ corporate bonds. While the gap was about 80bp during the financial crisis, it has now expanded to over 2.5 percentage points.

A Bank of Korea official stated, "Although overall interest rates have decreased, comparing the gap between high-quality and non-investment grade bonds shows that the yield difference has significantly increased. Even if the issuance rates have lowered, the issue is whether the market can absorb these bonds given the spread gap." He added, "Overseas, junk bond yields are being issued at historically low levels, but in Korea, due to the relatively small bond market, the policy's warmth does not seem to extend to non-investment grade bonds."

SMEs Survive on Loans... "They Can't Hold On Forever," Sighs

As the shock from the spread of COVID-19 subsides, the overall increase in corporate loans has slowed, but SME loans have reached record monthly highs. According to the August financial market trends, as of the end of August, the outstanding bank won-denominated loans to companies stood at 961 trillion won, an increase of 5.9 trillion won from the end of July. Compared to April (27.9 trillion won) and May (16 trillion won), the overall corporate loan growth is relatively modest, but the increase in SME loans (including individual business owners) of 6.1 trillion won was the largest on record. Meanwhile, large corporation loans decreased by 100 billion won over the month.

The loan conditions for SMEs are becoming increasingly negative. According to Bank of Korea analysis, using the first quarter of this year’s loan credit risk volatility as a baseline of zero, credit risk for large corporations rose to 13, but for SMEs it surged to 26. Credit risk is quantified based on surveys of financial institutions, reflecting the perceived risk when extending loans. During the financial crisis, caution toward large corporations spiked but quickly recovered, whereas during COVID-19, financial institutions have not eased their caution toward SMEs.

Especially toward the end of the year, banks that must meet the Basel International Settlement Bank (BIS) capital adequacy ratio find it difficult to recklessly increase lending, similar to the first half of the year.

The Bank of Korea attributes this phenomenon to the characteristics of COVID-19. A Bank of Korea official explained, "Due to the nature of the infectious disease, face-to-face service industries have been severely impacted, and these industries tend to be smaller in scale, leading to continued difficulties. Ultimately, COVID-19 must be resolved for fundamental problems to be solved; otherwise, the only options are to extend loan maturities or defer interest payments, which is a challenging issue."

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