Companies Flock to CP as Corporate Bond Market Cools...

Impact of US Fed's 'Big Step'
Sharp Rise in Corporate Bond Yields Leads Companies and Institutions to Hold Back
Shift to CP Issuance as a 'Avoid the Downpour' Strategy

"High Interest Rate Uncertainty Until September FOMC... Cooling Period Continues"

[Asia Economy Reporter Minji Lee] As central banks around the world accelerate interest rate hikes, the corporate bond market is entering a cooling period, leading to an increase in companies seeking funds through Commercial Paper (CP).

According to the Korea Securities Depository on the 17th, the amount of CP issuance rated A1 (highest credit rating) from the beginning of this month to the 16th totaled 9.08 trillion KRW. This is about 38% more compared to the same period last year (6.575 trillion KRW). The amount of CP issuance has been on the rise this year. In March, CP worth 15.65 trillion KRW was issued, and last month, 18.75 trillion KRW worth of CP was issued, exceeding the 10 trillion KRW and 13 trillion KRW issued in March and April of last year, respectively. This indicates that the volume of CP issued by companies this year has significantly increased compared to previous years.

Looking at the outstanding balance alone, as of the previous day, the A1-rated CP balance stood at 85.7545 trillion KRW, higher than the 71.7827 trillion KRW at the end of January and the 58.7986 trillion KRW in the same month last year.

CP refers to promissory notes issued by companies to raise short-term funds. Unlike corporate bonds, CP is issued under the Bills of Exchange Act rather than bond laws, making issuance simpler. There is no need to file a securities registration statement, and the company representative can issue it directly, so it is mainly favored by companies with lower credit ratings that find it difficult to issue corporate bonds. In terms of interest rates (1.9% for 91-day CP), it is also cheaper than general bank corporate loans.

Recently, the increase in CP issuance volume is because companies that could raise funds through corporate bonds are turning to the CP market. Due to the Fed's big step rate hikes and their aftermath, institutional investors holding cash are maintaining a wait-and-see stance in the corporate bond market, causing companies worried about issuance failures to postpone corporate bond issuance and move to the short-term funding market.

As it becomes harder for companies to raise long-term funds in the corporate bond market, concerns about an economic recession are also emerging. This recalls past experiences where companies, facing funding difficulties, resorted to rolling over debt through CP issuance. However, bond market experts analyze this as a 'strategic choice to avoid the storm.'

Kim Eun-gi, a bond research specialist at Samsung Securities, explained, "Previously, companies’ pre-issuance demand to reduce funding costs supported the corporate bond market, but that period is now over. With increased uncertainty over interest rate hikes and excessively widened corporate bond spreads, both companies and institutional investors will maintain a wait-and-see stance."

The credit spread, which gauges the issuance environment of the corporate bond market, stood at 83 basis points (bp) as of the previous day (1bp = 0.01%). The credit spread is the difference between the 3-year corporate bond yield rated ‘AA-’ and the 3-year government bond yield; the larger the spread, the more difficult the bond issuance environment. Generally, the bond market considers the environment stable when the benchmark interest rate and corporate bond spread move within the 30?50bp range. Considering the current interest rate spread, corporate bond yields are pricing in a benchmark rate increase to 2.5?2.75%.

The corporate bond market is expected to thaw in the second half of this year or early next year (due to the New Year effect). Researcher Kim said, "What the bond market is watching is whether the Fed will actively raise rates until the September FOMC (Federal Open Market Committee). Until this uncertainty disappears, institutional investors will defend yields mainly with 2-year asset-backed securities (ABS) that have solid fundamentals and interest rate appeal, while observing the market."

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