"Corporate Bond Net Repayment Trend Continues... No Significant Deterioration in Funding Conditions Expected"

Bank of Korea, September Monetary and Credit Policy Report
"Favorable Investment Demand, Considering Bank Loan Utilization"

The Bank of Korea explained that despite some concerns that companies may face difficulties in refinancing corporate bonds and securing medium- to long-term funding, it expects that "funding conditions will not significantly deteriorate, considering favorable investment demand and the utilization of bank loans."

The Bank of Korea stated this in the 'Recent Corporate Bond Issuance Status and Evaluation' section of the Monetary and Credit Policy Report released on the 14th.

Corporate bond issuance by general companies, which saw large net issuance in the first quarter of this year, shifted to a net redemption trend after April, leading to analyses suggesting that companies might face challenges in raising funds.

The Bank of Korea explained, "The sluggish corporate bond issuance was mainly due to some companies securing refinancing funds through early issuance, weakened incentives for corporate bond financing in terms of interest rates, and reduced medium- to long-term funding demand amid future economic uncertainties, rather than deteriorating issuance conditions such as market instability or lack of investment demand." It added, "Although corporate bond issuance remained sluggish after the second quarter amid ongoing domestic and international monetary policy tightening, it is judged that companies did not face significant difficulties in raising funds through corporate bond issuance."

From the perspective of investment demand, the instability in the CP (commercial paper) and bond markets related to real estate PF (project financing) that emerged in the second half of last year has largely subsided, significantly reducing the excess premium (investment sentiment toward credit bonds) on corporate bonds.

Investment in corporate bonds and related funds, mainly by individuals, has also increased. The Bank of Korea added, "Personal investment in corporate bonds through customer accounts has increased significantly by about 3.8 trillion won up to August this year, and as the perception that interest rates have peaked spread, inflows into bond-type funds also expanded."

The Bank of Korea mentioned, "Reflecting favorable investment demand, the participation rate in demand forecasts in the corporate bond issuance market has continuously exceeded the long-term average for both high-grade and non-investment grade bonds this year."

Although many unsold bonds occurred mainly in construction-related sectors due to the real estate market downturn and caution regarding PF, the Bank of Korea viewed the impact on the market as limited.

The Bank of Korea analyzed that companies' incentives to issue corporate bonds have diminished in terms of funding purposes and interest rates.

As corporate bond issuance rates turned upward in the second quarter, the interest rate advantage over bank loans declined, weakening companies' incentives to issue corporate bonds. The Bank of Korea explained, "With the rebound in long-term interest rates, corporate bond issuance rates turned upward, but the increase in bank loan rates, which use short-term rates as benchmark rates, was not significant, resulting in a substantial narrowing or inversion of the gap between the two rates."

From the perspective of funding methods, since March, expectations that interest rates could decline in the medium- to long-term have increased preference for bank loans, which have variable interest rates and relatively shorter maturities, over fixed-rate corporate bonds. The Bank of Korea added, "Bank loans to large corporations have continuously expanded, with companies mainly covering necessary operating funds through loans rather than corporate bond issuance, some of which are estimated to have been used to repay maturing corporate bonds."

The Bank of Korea stated, "Although net redemption of corporate bonds may continue for the time being, considering favorable investment demand and the utilization of bank loans, it is expected that companies' funding conditions will not significantly deteriorate." However, it added, "Given the high domestic and international economic uncertainties and potential risks related to real estate finance, differentiation in funding conditions for non-investment grade and vulnerable sectors may intensify, so it is necessary to closely monitor these companies' funding situations and the possibility of deterioration in financial soundness."

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