Concerns Over PF Defaults Drive Large Securities and Capital Firms' Borrowing Rates Soaring

Prime Securities and Capital Companies' 3-Year Bonds Yield Over 5%
Non-Prime Financial Firms Face Funding Difficulties... Polarization Deepens

Yeouido Stock Market Photo by Hyunmin Kim kimhyun81@

As bond financing rates for major securities firms and capital companies exceed 5%, the funding environment for the secondary financial sector continues to deteriorate. Concerns over the creditworthiness of securities firms and capital companies are growing due to the combined effects of domestic and international interest rate hikes, project financing (PF) defaults, and losses from overseas alternative investments. For some small and medium-sized financial companies with significant default risks, securing bond investors is also becoming increasingly difficult.

Major Securities Firms Also Face Financing Rates Above 5%... Concerns Over Profitability and Financial Structure Deterioration

On the 17th, Korea Investment & Securities barely issued 3-year corporate bonds at 5.175%. The issuance rate for 2-year bonds also approached 5%, standing at 4.984%. Although the long-term 10-year bond rate was set at 5.181% in March, this is the first time in several years that the bond rates for securities bonds with maturities under 3 years among the top five major domestic securities firms have exceeded 5%.

An investment banking (IB) industry insider explained, "Korea Investment & Securities attempted to issue up to 300 billion KRW in corporate bonds but only managed to issue 230 billion KRW due to insufficient investor demand," adding, "This confirmed a sharp decline in institutional investors' appetite for securities firm bonds."

Earlier, Daol Investment & Securities faced an unsold bond issue situation. They attempted to issue 80 billion KRW in corporate bonds through a demand forecast but could only issue 50 billion KRW due to insufficient demand. The maturity of funding is also shortening continuously. Although 6-year bonds were issued in March and May this year, recently, even 1-year and 1.5-year bonds have struggled to secure sufficient demand.

The cold sentiment toward securities bonds is due to a combination of factors including PF defaults, losses from overseas alternative investments, and bond valuation losses caused by rising market interest rates. The rates for commercial paper (CP) and short-term bonds, which are major funding tools for securities firms, are also soaring. Although there are some differences depending on the creditworthiness of securities firms, short-term funding rates for maturities under one year have risen to between 4% and 7% depending on credit rating.

As a result, the issuance of CP and short-term bonds by securities firms is also shrinking. According to the short-term funding market, domestic securities firms have issued 277.7 trillion KRW in CP and short-term bonds over the past year and repaid 279 trillion KRW, resulting in a net repayment of about 1.3 trillion KRW. This contrasts with the past trend of large-scale net issuance aimed at asset growth.

A credit rating agency official said, "Even within the same credit rating, there is a polarization in funding rates between bank-affiliated securities firms such as KB Securities, NH Investment & Securities, and Shinhan Investment Corp., and non-bank-affiliated securities firms without backing," adding, "This suggests a significant difference in profit-generating capabilities between bank-affiliated and non-bank-affiliated firms."

Bond Rates for Prime Capital Companies Also Exceed 5%... Subprime Firms Unable to Secure Funding

Bond (specialized credit finance bonds, yeojeonchae) financing rates for capital companies heavily invested in PF are also soaring. The 3-year bond financing rate for AA- rated specialized credit finance companies has surpassed 5%, reaching the highest level since the Legoland incident stabilized. Many domestic capital companies are rated AA-. The bond financing rates for A-grade (A+, A, A-) specialized credit finance companies have risen to between 6% and 8%. A bond market insider stated, "Specialized credit finance companies rated BBB or below are in a situation where it is difficult to secure routine operating funds even if they pay double-digit interest rates."

As the funding environment worsens, pessimistic forecasts suggest that capital companies will struggle to grow their assets. Capital companies generate profits through retail loans, leases, and PF loans using funds raised by issuing bonds, but rising financing rates have made it difficult to secure profitability. An IB industry insider primarily involved in underwriting specialized credit finance bonds said, "Capital companies that have expanded assets through PF especially need to find alternative profit sources to replace PF, but it is not easy to discover high-yield investment opportunities that can generate interest rate spreads," expressing concern that "the asset growth of capital companies is likely to stagnate or contract."

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