Increase in Corporate Bond Issuance Cancellations Due to 'Funding Cost Burden'

Dozens of Publications Canceled in Recent Months... Exceeding the Total Cancellations of the Past 3 Years

[Photo by AP Yonhap News]

[Asia Economy Reporter Park Byung-hee] Major foreign media reported on the 17th (local time) that plans to issue corporate bonds are being canceled one after another as funding costs rise due to consecutive interest rate hikes by central banks, including the U.S. Federal Reserve (Fed).

According to Bloomberg statistics, there have been dozens of cases of canceled corporate bond issuance plans in recent months. Mark Rina, co-head of European bonds at French bank BNP Paribas, said, "Although cancellation records are rare, the number of cancellations in the past three months exceeds the number of cancellations in the past three years."

After the Fed decided on a big step (a 0.5 percentage point increase in the benchmark interest rate) for the first time in 22 years in May and a giant step (a 0.75 percentage point increase) for the first time in 28 years in June, more companies are feeling the burden of increased bond issuance costs. In particular, the number of corporate bond issuance cancellations in the Europe, Middle East, and Africa (EMEA) region in June increased more than threefold compared to May.

Central banks are raising corporate funding costs not only by raising benchmark interest rates but also by stopping asset purchases.

In the case of the European Central Bank (ECB), the amount of corporate bonds held increased from 195 billion euros at the beginning of the COVID-19 pandemic to 345 billion euros as of the end of June. The ECB eased companies' cost burdens by purchasing corporate bonds when European companies issued them.

However, the ECB, which has announced an interest rate hike for the first time in 11 years at the monetary policy meeting on the 21st, will no longer purchase new bonds.

According to financial information provider Refinitiv, the European market saw corporate bond issuance worth 1.2 trillion dollars last year when low interest rates were maintained. However, the value of newly issued corporate bonds in the first half of this year fell by 17% compared to the same period last year. The issuance volume of non-investment grade corporate bonds decreased by 78% year-on-year, marking the lowest level since 2009.

German holding company Mutares canceled its plan to issue 175 million euros in bonds last month after promising a 7.5% interest rate but finding it difficult to attract investors. Earlier in May, French car rental company Europcar withdrew its plan to raise investment to increase its vehicle fleet after investors demanded unprecedentedly high interest rates.

The corporate bond credit crunch is also bad news for banks. Banks underwrite non-investment grade corporate bonds and then sell them to professional investors. If investors demand higher interest rates, banks face increased cost burdens and may have to bear losses.

JP Morgan Chase and Morgan Stanley recently suffered setbacks after underwriting corporate bonds issued by gambling company 888 to acquire the European business of competitor William Hill but failing to find investors. Although JP Morgan and Morgan Stanley offered an interest rate of 11.5%, much higher than the market rate of about 7%, they struggled to find investors.

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