Impending Interest Rate Hike... Polarization in the Corporate Bond Market

Growing Uncertainty Worsens Investor Sentiment
Credit Spreads Widen
Only Top-Tier Ratings Like SK Attract Demand
Corporate Fundraising Difficulties Inevitable

[Asia Economy Reporter Minji Lee] As uncertainty over monetary policy increases, the corporate bond market is tightening, leading to a polarization phenomenon where funds are concentrated only in the top-tier credit rating (AA+). Even large corporations with a high rating (A) are struggling to secure funds, making it inevitable that companies will face difficulties in raising capital.

According to the investment banking (IB) industry on the 15th, the credit spread (the difference between the 3-year corporate bond yield based on AA- and the 3-year government bond yield; a larger figure indicates a more difficult issuance environment), which gauges corporate bond investment sentiment, stood at 59bp (1bp=0.01%p) as of the 14th. In February last year, the spread hovered around 30bp, allowing the corporate bond market to enjoy a boom, but this year, concerns over interest rate hikes have intensified, causing institutional investors' appetite for corporate bonds to sharply decline.

With the U.S. Federal Reserve's (Fed) interest rate hike imminent and market expectations growing that the Bank of Korea will raise its base rate further, the credit spread is widening. Initially, the bond market expected that uncertainty over monetary policy would be resolved after the Monetary Policy Committee (MPC) meeting on the 14th of last month. However, as optimism grew that the U.S. would increase both the frequency and magnitude of rate hikes due to strong economic indicators, bond investors appear to be keeping the upper limit of the base rate open and adopting a wait-and-see approach.

In the domestic corporate bond market, investment sentiment seems to be concentrated mainly on top-tier ratings. On the previous day, SK (AA+) succeeded in its demand forecast for 3-year (KRW 150 billion), 5-year (KRW 100 billion), and 10-year (KRW 50 billion) bonds totaling KRW 300 billion, receiving orders of KRW 350 billion, KRW 260 billion, and KRW 110 billion respectively. The interest rate band was set at -30bp to 30bp, and the issuance was completed at 7bp, 7bp, and 0bp respectively. Although it failed to issue under negative interest rates (under issuance), considering that recent major companies have been issuing bonds at the upper end of the interest rate band, institutional investors' appetite for top-tier ratings is still alive.

Earlier, Lotte Confectionery (AA) received orders worth KRW 340 billion for a KRW 100 billion 3-year bond issuance but issued at 15bp, and Hanwha Construction (A-) filled only KRW 64 billion out of KRW 60 billion sought for a 3-year bond, setting the issuance spread at the upper end of the interest rate band of 30bp.

A bond industry official said, "While under issuance decreased in last year's demand forecasts, except for top-tier ratings, most bonds are being issued at the upper end of the interest rate band with oversubscription." He added, "In SK's case, institutional investor sentiment was good, so the interest rate was set at a relatively favorable level compared to the market environment." On the same day as SK's demand forecast, Hanshin Engineering & Construction (BBB) received orders worth KRW 85 billion for a KRW 70 billion 2-year bond. Although they considered increasing issuance to KRW 140 billion if additional orders came in, the order amount was lower than expected, so issuance is likely to proceed at the originally forecasted amount.

Bond experts predict that investment sentiment for corporate bonds other than top-tier ratings may worsen further. As liquidity in the bond market is significantly decreasing, the upper limit of interest rates desired by institutions is also expected to rise. Eun-ki Kim, a researcher at Samsung Securities, said, "This week, the demand forecast size is expected to be about KRW 2 trillion, more than twice the weekly average of KRW 1 trillion," adding, "A-rated companies are actively seeking the corporate bond market, but to avoid unsold bonds, they will need to offer a higher interest rate band of around 60-70bp rather than the current 30bp."

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