Before Interest Rates Rise Further... Companies Hurry to Secure Funding

[Asia Economy Reporter Minji Lee] The number of companies seeking to issue corporate bonds before interest rates rise further is increasing. Recently, the number of companies issuing corporate bonds has significantly decreased due to the traditional off-season and concerns over base rate hikes. However, as interest rates are expected to rise over time, more companies are trying to raise funds while borrowing costs are still relatively low.

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According to the financial investment industry on the 1st, major listed companies such as DL Construction (KRW 50 billion), Korea Financial Group (KRW 150 billion), E1 (KRW 100 billion), Lotte Rental (KRW 200 billion), and Chong Kun Dang (KRW 100 billion) plan to conduct demand forecasts for fundraising this month. Following the Bank of Korea's 0.25 percentage point increase in the base rate, the demand to quickly secure funds before interest rates rise further appears to have led to an increase in companies conducting demand forecasts. In mid-last month, due to uncertainty about rate hikes, no companies issued corporate bonds after Shinhan Financial Investment on the 12th.

The volume of corporate bond issuance by companies is expected to increase significantly this month. Since the Bank of Korea announced additional base rate hikes within the year, companies aiming to issue corporate bonds within the year are expected to do so this month to reduce issuance costs. Eun-ki Kim, a researcher at Samsung Securities, explained, "From mid-July to mid-August, there was a pattern of a significant increase in corporate bond issuance due to deferred demand caused by the submission of semi-annual reports. Especially with the possibility of a base rate hike in August and additional hikes within the year, refinancing demand for bonds maturing in the fourth quarter is expected to appear as early issuance demand in September."

Despite the base rate hike decision, bond yield volatility has not yet increased significantly. The current bond market yields already reflect about two expected base rate hikes, so high-quality companies are not facing major difficulties in demand forecasting. Corporate bond investor sentiment remains stable due to abundant liquidity, leading some companies to increase issuance amounts. On the 27th, Samsung Biologics (A+) planned to issue KRW 300 billion in corporate bonds for facility funding?the first since its establishment?and conducted a demand forecast that attracted KRW 1.57 trillion, leading to a decision to increase issuance to KRW 500 billion. Posco Chemical, which conducted a demand forecast the previous day, also raised KRW 700 billion against a KRW 120 billion target and is expected to increase issuance up to KRW 200 billion. Hwajin Lee, a researcher at Hyundai Motor Securities, said, "Although high-yield investment sentiment may be somewhat dampened by the spread of the Delta variant, the ongoing economic recovery means a sharp rise in corporate bond yields is unlikely."

Accordingly, the volume of corporate bond issuance this year is expected to reach an all-time high. According to the Bond Information Issuance System of the Korea Financial Investment Association, the net issuance of corporate bonds since the beginning of the year reached KRW 28.0766 trillion, significantly surpassing the KRW 26.4642 trillion recorded in the same period last year and the KRW 27.0721 trillion in 2019. Researcher Hwajin Lee explained, "As capital investment and active mergers and acquisitions have increased, companies have flocked to the corporate bond market to secure funds at low costs," adding, "Since companies have increased issuance to secure liquidity after COVID-19, net issuance is expected to decline next year compared to this year."

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