"Frozen Bond Funding Crunch" Shrinks Issuance... Corporate Giants Face Financing 'Emergency' and Underwriting Performance 'Contraction'

[Asia Economy Reporter Lee Seon-ae] The bond market's liquidity crunch is worsening due to significant interest rate hikes and the aftershocks of the Legoland incident. As net issuance of corporate bonds sharply declined, the overall net issuance in the bond market contracted drastically. With corporate financing difficulties reaching a serious level, the decrease in bond issuance has also increased the likelihood of securities firms experiencing negative growth in bond underwriting performance this year.

According to the Bond Information Center of the Korea Financial Investment Association on the 3rd, the net issuance in the bond market last month recorded -108.2 billion KRW. This means that the redemption amount (55.2764 trillion KRW) exceeded the issuance amount (55.1682 trillion KRW). This is the second negative figure following June. Looking at the monthly net bond issuance trends: ▲January 27.4834 trillion KRW ▲February 21.4289 trillion KRW ▲March 18.9410 trillion KRW ▲April 17.6215 trillion KRW ▲May 23.8140 trillion KRW ▲June -12.4005 trillion KRW ▲July 17.7769 trillion KRW ▲August 15.6195 trillion KRW ▲September 5.8719 trillion KRW. Last month’s situation differs from June’s case, where the government reduced national bond issuance as part of debt management. However, last month’s decline was influenced by a sharp drop in corporate bond net issuance.

In October alone, corporate bond net issuance was -4.8379 trillion KRW. The redemption amount (8.5300 trillion KRW) was more than double the issuance amount (3.6921 trillion KRW). Until the previous month, although net issuance had decreased, redemptions had not exceeded issuance. For two consecutive months, net issuance had remained around 600 billion KRW. This year, corporate bond net issuance turned negative twice?in May (-611.1 billion KRW) and July (-248.1 billion KRW)?but a net redemption close to 5 trillion KRW is unprecedented. It is the largest net redemption amount since 2006.

This indicates that more companies are experiencing financing difficulties. Due to interest rate hikes and the ripple effects of the Legoland real estate project financing (PF) issue, a sense of crisis has spread in the bond market, leading to poor bond issuance. Even when bonds were issued, the targeted demand forecast amounts were not met, resulting in consecutive unsold bonds. Furthermore, even if issuance and subscription succeeded, the high interest rates significantly increased corporate financing costs, placing companies in a difficult position. In fact, even large conglomerate affiliates have been securing funds at annual interest rates around 7%. Samsung Heavy Industries issued 30 billion KRW of private bonds at an interest rate of 7.05% on the 28th of last month. Korea Seven also issued 20 billion KRW of private bonds at 7.08% on the 31st. SK Rent-a-Car raised 100 billion KRW through public corporate bonds on the 20th, with interest rates set between 6.11% and 6.29%. On the 21st and 28th of last month, it issued private bonds worth 10 billion KRW each at 6.95% and 7%, respectively.

As corporate bond interest rates rose, companies rushed to banks for financing, causing bank bond issuance to hit a record high in September. Bank bond issuance this year through the end of last month totaled 175.399 trillion KRW, a 17% increase compared to 150.1723 trillion KRW during the same period last year. This already accounts for 96% of last year’s total annual issuance (183.2123 trillion KRW). The net issuance of bank bonds in September also reached 7.46 trillion KRW, the highest this year. However, in October, net issuance decreased to 260 billion KRW. This is interpreted as an effect of the authorities’ decision to postpone by six months the plan to raise the Liquidity Coverage Ratio (LCR) regulatory ratio to minimize bank bond issuance. Increasing bank bond issuance could exacerbate market instability by causing supply-demand imbalances that push bond yields and loan interest rates higher, so this measure aims to curb such concerns.

Nevertheless, despite the short-term move to minimize bank bond issuance, the sidelining of corporate bonds is expected to continue. Although financial authorities are providing liquidity support, experts believe it will take considerable time for the corporate bond market to recover due to high interest rates and cooling investor sentiment. Min Ji-hee, a researcher at Mirae Asset Securities, explained, "If a big step (a 0.50 percentage point hike in the base rate) is taken at this month’s Monetary Policy Committee meeting, concerns about liquidity tightening may resurface, and the volatility in the bond market, which had stabilized due to government support measures, could increase again."

Meanwhile, amid high concerns about the bond issuance market, the possibility of negative growth in securities firms’ bond underwriting performance has also emerged. This year, securities firms’ bond underwriting performance totaled 128.8518 trillion KRW through October. Due to the contraction of the bond market, even the top underwriters are understood to have achieved only about half or less of last year’s annual performance.

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