"Funding Conditions for Non-Investment Grade Companies Worsen in Corporate Bond and CP Credit Securities Market"

Bank of Korea: Funding Conditions for Non-Investment Grade Companies Are Deteriorating
Issuance of Non-Investment Grade Bonds Declining; Alternative Funding Reliance Increasing

The Bank of Korea has recently diagnosed that funding conditions for non-investment grade companies are deteriorating in the credit securities market, including corporate bonds and commercial paper (CP).

In the report titled "Recent Assessment and Evaluation of Credit Securities Market Conditions" released on April 24, the Bank of Korea stated this assessment. According to the Bank, the recent credit securities market has maintained a favorable trend, with credit spreads stabilizing downward and a considerable amount of net issuance taking place. Credit spreads for both investment grade and non-investment grade corporate bonds are at the long-term average levels seen since 2013, and CP credit spreads have narrowed across all ratings, falling below their long-term averages. The Bank of Korea evaluated, "The issuance market is also functioning smoothly, with net issuance in both corporate bonds and CP, and a high participation rate in demand forecasting for corporate bonds."

However, the Bank provided a more detailed analysis indicating that issuance conditions for non-investment grade securities are becoming more difficult. The Bank of Korea pointed out, "The proportion of non-investment grade issuances in the corporate bond market is decreasing, and some companies in sectors with poor business conditions have even failed to sell their corporate bonds." In the CP issuance market, the Bank explained that the issuance rate for non-investment grade CP has either stopped declining (A2 rating) or has actually increased (A3 rating). In the secondary market, while yields for investment grade securities have shown a clear downward trend due to the effects of the last three policy rate cuts, the decline in yields for non-investment grade securities (A-, A2 or lower) has been relatively limited. The spread in yields within the same rating category has also remained significant.

Regarding recent supply and demand conditions, the Bank noted that on the demand side, institutional investors' investment stance has become somewhat more conservative due to increased credit concerns, and individual investors' demand for non-investment grade credit bonds has also weakened. On the supply side, the Bank explained that as credit concerns have increased recently, companies with questionable creditworthiness are increasingly relying on alternative funding methods, such as instruments with unfavorable maturities or cost conditions, in addition to corporate bonds. Over the past year, among companies whose credit ratings (including outlook) have been downgraded, public corporate bond funding has decreased, while funding through CP and privately placed bonds has increased, indicating a higher dependence on short-term and high-cost alternative funding sources. This trend has been particularly pronounced among companies in sectors facing business downturn concerns, such as chemicals, construction and real estate, and some holding companies, which are experiencing difficulties in securing funding.

The Bank of Korea concluded, "While overall conditions in the credit securities market remain favorable, funding conditions for some non-investment grade companies are becoming more challenging, so it is necessary to strengthen related monitoring." The Bank also cautioned, "If overall credit securities investment demand contracts and corporate performance worsens amid trade disputes triggered by U.S. tariff policies, the current credit concerns, which are limited to certain vulnerable sectors, could spread throughout the market, so attention is required."

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