Despite Interest Rate Concerns... Money Flows into Reopening Corporate Bonds

Expectations for Accommodation and Passenger Business Performance
Korean Air and Hotel Shilla Successfully Undersubscribed

[Asia Economy Reporter Minji Lee] Reopening companies are also the trend in the bond market. Although the uncertainty in the corporate bond market has increased as domestic government bond yields continue to rise, money has poured into corporate bonds of companies that suffered from COVID-19.

According to the bond evaluation industry on the 3rd, the credit spread, which can gauge corporate bond investment sentiment, stood at 73bp (1bp=0.01%P) as of the 2nd. The credit spread, which hovered around 55bp at the beginning of this year, exceeded 70bp in just over four months. The figure rose sharply as the prolonged Russia-Ukraine war and the possibility of the U.S. Federal Reserve (Fed) implementing a ‘giant step’ by raising interest rates by 75bp at once emerged. The credit spread is the difference between the 3-year corporate bond yield of credit rating ‘AA-’ and the 3-year government bond yield; a larger figure is interpreted as a more difficult environment for bond issuance.

Despite these adverse conditions, companies expected to benefit from reopening have succeeded in ‘under’ issuance, maintaining relatively favorable conditions. Under issuance means setting the interest rate lower than the average rate (Minpyeong) suggested by private bond evaluators. As liquidity flowing into the corporate bond market shrinks, most companies are conducting ‘over’ issuance. On the previous day, Korean Air issued bonds worth a total of 300 billion KRW by raising 518 billion KRW in total for 2-year (100 billion KRW) and 3-year (100 billion KRW) bonds despite its low BBB+ rating. The winning yields were under-issued by 43bp and 30bp compared to individual Minpyeong for the 2-year and 3-year bonds, respectively. Hotel Shilla (AA-) also increased issuance to 350 billion KRW by raising about 900 billion KRW for 2-year 70 billion KRW, 3-year 150 billion KRW, and 5-year 30 billion KRW bonds. Looking at the winning yields, the 3-year bond was under-issued by 5bp compared to Minpyeong.

Korea Asset Evaluation analyzed, "The easing of quarantine rules positively affected industries such as lodging, which had been negatively impacted by COVID-19, and the easing of COVID-19 restrictions reflected the expectation of performance recovery in the international passenger sector in bond demand."

Meanwhile, as uncertainty in the bond market increases, it is expected to become more difficult for companies to raise funds through corporate bonds. As the U.S. broadens the pace of interest rate hikes and the domestic consumer price inflation rate in April was recorded at 4.8% (compared to the same month last year), the largest increase in 13 years and 6 months since the financial crisis, expectations are growing that the Bank of Korea’s Monetary Policy Committee will raise interest rates again in May.

Researcher Jina Kim of Eugene Investment & Securities said, "Everyone has been waiting for the May FOMC, but opinions are emerging that a giant step will be necessary in June, so this meeting is unlikely to provide reassurance about monetary policy," adding, "In the short term, the scale of the second supplementary budget to be announced shortly after the new government’s inauguration could increase supply burden risks."

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