Frozen Corporate Bond Demand... More Than Half of A-Grade Unsubscribed

Corporate Bond Demand Plummets
58% of A-Grade Unsubscribed
Rising Benchmark Interest Rates
Maturity Shortened

[Asia Economy Reporter Junho Hwang] It has been revealed that concerns over institutional evaluation losses due to rising interest rates and increased funding costs for issuers have intensified the contraction of the corporate bond issuance market.

The Korea Financial Investment Association announced on the 19th the '2022 Q3 Public Corporate Bond (Unsecured Bonds) Demand Forecast Status' containing this information.

Sharp Decline in Corporate Bond Demand

In the third quarter of this year, a total of 65 cases (5.5 trillion KRW) of public unsecured bond demand forecasts were conducted. This is a 43% decrease compared to 49 cases in the same period last year. The forecast amount also shrank by 39% to 3.5 trillion KRW. The competition rate also dropped sharply to 196% compared to 348% in Q3 last year.

Looking at credit ratings, in Q3 this year, AA-rated or higher high-grade bonds showed a solid competition rate with 9.7 trillion KRW (233%) participation against a forecast of 4.2 trillion KRW.

However, for A-rated bonds, the forecast scale was only 1.1 trillion KRW, less than half compared to 2.9 trillion KRW in the same period last year. The competition rate also fell to 61%, about one-sixth of last year's 364% in the same period.

Regarding the proportion of demand forecasts by credit rating, in Q3 last year, AA-rated bonds accounted for 61% and A-rated bonds 33%, showing a balance. However, this year, AA-rated bonds accounted for 73%, while A-rated bonds were only 19%, indicating a deepening polarization.

The association analyzed, "Due to rising inflation, the Federal Reserve's final benchmark interest rate outlook has been revised upward, weakening expectations for monetary policy easing," and added, "This is the result of intensified market contraction caused by increased concerns over institutional evaluation losses due to rising interest rates and increased funding cost burdens on issuers."

58% Non-Sale Rate for A-Rated Bonds, Rising Decided Interest Rates, and Shortened Maturities

Additionally, the Korea Financial Investment Association analyzed that Q3 this year showed characteristics of increased non-sales centered on A-rated bonds, rising decided interest rates, and shortened maturities.

In Q3 this year, non-sales occurred in 16 cases (950 billion KRW), recording a non-sale rate of 14%, which is a 13 percentage point increase compared to the previous year. Especially, in A-rated bonds, 8 cases (650 billion KRW) of non-sales occurred, resulting in a high non-sale rate of 58%.

Due to a preference for safe assets and market contraction, the gap between issuers' and investors' desired interest rates widened, causing the decided interest rate for corporate bond issuance to rise by 20.8 basis points compared to the same period last year. Concerns over the continuation of a strong tightening stance led institutional investors to reduce evaluation losses and issuers to prefer short-term bonds to reduce interest expenses, resulting in shortened maturities for corporate bonds. The proportion of short-term bonds with maturities of 3 years or less was 61%, up 4 percentage points from the previous year. Ultra-short-term bonds of 2 years or less also increased by 15 percentage points to 23% compared to the previous year.

Mostly Securities Firms for A-Rated and Below

Looking at participation status by industry, securities firms accounted for 42% of total participation volume, asset management companies 22%, pension funds and others 22%, and banks and insurance companies each 7%. The association analyzed, "While institutional investors' participation was low due to concerns over evaluation losses during the interest rate hike period, the proportion of securities firms increased by 8 percentage points compared to the same period last year due to increased retail demand from individual investors."

Pension funds and other institutions preferred AA-rated or higher bonds (24%). In contrast, participation in A-rated bonds was only 2%, a sharp decline from 14% in the same period last year.

Most of the corporate bond allocation volume was taken by securities firms (45%), followed by asset management companies (17%), pension funds and others (22%), and banks and insurance companies (7%).

Similar to the participation status by industry, securities firms accounted for 76% of BBB-rated bond allocations. It was found that the retail division of securities firms received most of the non-investment grade bonds.

The association explained, "This figure confirms that the retail division of securities firms is the main demand base for high-interest, low-credit corporate bonds."

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