"This Year-End Is Different"... Warmth in the Credit Market

Typical Weakness in Bond Market in November and December
Concerns Despite Overlapping COVID-19

Demand Surges Even for Low-Credit Bonds
Corporate Bond Sentiment Strong Through Next Year

[Asia Economy Reporter Minji Lee] There is a saying in the credit market that it gets colder as the year-end approaches. As the year-end nears, investors gradually withdraw, and the corporate bond issuance environment deteriorates. This year, concerns about rising bond yields arose due to the resurgence of the novel coronavirus infection (COVID-19), but the situation turned out differently than expected. Demand surged not only for top-tier bonds but also for low-credit bonds, allowing issuing companies to raise funds at low interest rates.

◆ Warmth in the credit market... Issuing companies smile = According to the financial investment industry on the 25th, the demand forecast competition rate for corporate bonds issued by companies this month has significantly increased. On the 19th, NH Investment & Securities (AA+) issued 3-year, 5-year, and 7-year corporate bonds to repay debt, recording competition rates of 8%, 4.20%, and 6.03%, respectively. For the 3-year bonds, 560 billion KRW was received for a 70 billion KRW offering, and a total of 1.16 trillion KRW flowed in for a total offering of 200 billion KRW. Although the rating is relatively lower, Hana F&I (A0) also raised 768 billion KRW for a 150 billion KRW offering to repay debt and secure operating funds. All these companies succeeded in their offerings and are considering increasing the issuance. Because more money than expected poured in, they can raise funds at cheaper interest rates.

Recently, with active economic stimulus measures by governments worldwide and growing expectations for COVID-19 vaccine development, companies are issuing corporate bonds stably in the credit market. SK (AA+), which is also classified as a top-tier bond and is conducting a demand forecast on this day, is expected to smoothly raise 200 billion KRW.

In the bond market, interest rates usually rise toward the year-end, widening the spread between corporate bond yields and government bond yields. This is because it is the book-closing period, and the regular evaluation of commercial paper (CP) is conducted in November and December, affecting corporate bond investment sentiment. However, from the third quarter onward, companies have shown stable performance, and with increased expectations for early COVID-19 vaccine development, the bond market seems to be experiencing a different year-end than usual.

Sangman Kim, a researcher at Hana Financial Investment, said, "As the third-quarter corporate earnings disclosures conclude and demand forecasts resume in the issuance market, the expected redemption volume until December maturity (2.3 trillion KRW) is believed to be sufficiently absorbed from a supply-demand perspective," adding, "Third-quarter corporate earnings have exceeded expectations, and the upward trend in market interest rates has eased, leading to expanded corporate bond investment sentiment."

The short-term funding market, which triggered credit tightening in the credit market this year, is also stabilizing based on abundant liquidity. On April 2, the CP rate surged to 2.23%, but as of the previous day, the CP rate recorded an all-time low of 1.09%. The base rate and negotiable certificate of deposit (CD) rates are heading toward historic lows, and the COVID-19 issues that influenced interest rates are also observed to have dulled.

◆ "Credit market strength to continue until next year... Issuance volume to decrease" = Bond market experts predict that companies will face no significant difficulties in raising funds in the corporate bond market next year. Although some companies' ratings may be adjusted in the credit rating agencies' regular evaluations in the first half of next year, the interest rate level is already higher than before COVID-19, so it is not expected to significantly affect investment sentiment.

Institutional investors also agree that "uncertainty has cleared." In April and May, when COVID-19 spread severely, the difficulty in predicting interest rates dampened institutional investors' demand. However, at this point, it is possible to anticipate companies whose ratings may fall by industry, and government policies such as the bond market stabilization fund, special financial stability loan system, and corporate liquidity support organization (SPV) are in operation to stabilize the corporate bond market, so there are few factors that could worsen investment sentiment.

Eungki Kim, a researcher at Samsung Securities, said, "Since March, most corporate bonds have been issued at the upper end of the interest rate band, but this band itself has more than doubled compared to the pre-COVID-19 level," adding, "Buyers are aware of this situation, so although there will be differences by industry, the credit market will generally show strength."

Meanwhile, next year's corporate bond issuance volume is expected to decrease compared to this year. Since domestic companies have secured cash by issuing more than 50 trillion KRW in corporate bonds annually since last year, they are not expected to issue additional bonds. Researcher Kim explained, "Last year, as CD and government bond rates began to invert, many companies tried to accumulate cash at low funding costs, whereas this year, most companies secured cash due to COVID-19," adding, "With corporate operating performance expected to improve next year, companies seeking precautionary liquidity will decrease."

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