Corporate Bonds Also Outpaced by Non-Bank Financial Bonds... Increased Burden for Card and Capital Companies in the Second Half

Concerns Rise Over Real Estate PF Due to Saemaeul Geumgo and GS Construction Insolvency
Uncertain Outlook for Yeojeon Bonds... "Funding May Remain Difficult"

Interest rates on specialized credit finance bonds, a funding source for specialized credit finance companies, have surpassed those of corporate bonds with the same rating. Since the emergence of the Saemaeul Geumgo and GS Construction insolvency issues last month, concerns over real estate project financing (PF) have persisted, leading to a contraction in market investment sentiment. Given that soundness issues may continue in the second half of the year, there are forecasts that the business environment for card and capital companies will remain challenging.

According to the Korea Financial Investment Association on the 28th, the interest rate on specialized credit finance bonds (AA+, 3-year) ? a major funding source for card companies ? recorded 4.502% as of the 25th. It rose into the 4.5% range in late this month. On the 22nd, it hit 4.508%, the highest since January 20. This marks an increase of about 70 basis points (bp; 1bp=0.01%) compared to the annual low of 3.804% on March 24.

It even surpassed corporate bonds of the same rating. As of the 25th, the 3-year corporate bond (public offering/unsecured, AA+) interest rate was 4.455%, 4.7bp lower than the specialized credit finance bond rate. While concerns over bond market tightening eased at the beginning of the year, causing specialized credit finance bond rates to fall below corporate bond rates from early February, the trend reversed again from mid-July after about five months. Despite being financial institutions, they are in a situation where they must offer higher interest rates than private companies to secure funding.

The insolvency of Saemaeul Geumgo rekindled fears of a real estate PF crisis, burdening investor sentiment. In June, Namyangju Dongbu Saemaeul Geumgo declared dissolution after failing to manage the increased loan delinquency rate in the first half of the year, spreading concerns about insolvency across Saemaeul Geumgo as a whole. The indictment of Park Cha-hoon, chairman of the Saemaeul Geumgo Central Association, and executives over various financial scandals including real estate PF loans also acted as negative factors. Additionally, GS Construction’s poor construction issues surfaced, further dampening the real estate PF market.

Capital companies’ bond interest rates are soaring even higher. The 3-year financial bond with an AA- rating recorded 4.845% as of the 25th, the highest since the end of January. Jeong Hye-jin, a researcher at Shinhan Investment Corp., explained, “Capital companies overall have experienced profitability declines due to increased interest expenses and early recognition of non-performing loans, leading to higher bad debt costs. With rising delinquency rates over one month and increased ratios of watch-listed and substandard loans, asset soundness is deteriorating, making it difficult to give a positive evaluation of capital companies’ fundamentals.”

Recently, the spotlight on China’s real estate risks and growing stock market uncertainty could also act as a negative factor for the specialized credit finance bond market in the future. Securities firms invest about 60% of the principal in bonds when issuing equity-linked securities (ELS). Specialized credit finance bonds, with their high interest rates and ease of issuance, have been used as a hedge. An increase in ELS issuance leads to higher demand for specialized credit finance bonds. However, as global stock market instability triggered by China has increased, ELS cancellations and reduced issuance have caused investment sentiment toward specialized credit finance bonds to waver. This underpins forecasts that funding conditions for card and capital companies may worsen further.

Researcher Jeong analyzed, “While capital companies are managing PF loan assets, their exposure relative to equity capital is significant, and the risk occurrence timing may have been deferred through bridge loan extensions. The issuance of derivative-linked securities such as ELS, a major supply source, is also uncertain amid stock price volatility, lowering expectations for improvement in the specialized credit finance bond market.”

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