Korean firms rush to sell bonds with yields at over 2-yr low

South Korea’s corporate bond markets are having an unusually busy summer as companies are rushing to sell debts to lock in lower interest costs.

With investors’ flight to safe-haven assets accelerating on fears of an economic recession, investment-grade corporate bond yields have plunged to their lowest levels in nearly two and a half years in anticipation of interest rate cuts by the US Federal Reserve and the Bank of Korea.

This month, a number of South Korean companies with credit ratings of AA minus to AA plus are lining up to raise a combined 3.35 trillion won ($2.4 billion) in new bonds. They include SK Inc., the holding company of SK Group; Seoul Broadcasting System (SBS), one of South Korea’s three main public broadcasters; S-Oil Corp.; KB Securities; and Kiwoom Securities Co.

The tally is about 10 times more than the amount Korean companies usually raise in the domestic AA-grade bond market for an average month in the summer, typically off-season for the primary fixed-income market.

The yield on three-year corporate bonds rated AA minus fell to 3.271% as of market close on Monday when the South Korean stock market suffered its worst day in its history.

That is its lowest level since hitting 3.163% on March 25, 2022, according to the Korea Financial Industry Association (KOFIA).

On Wednesday, the three-year corporate bond yield rebounded slightly to 3.397% but was still below the Bank of Korea’s policy rate of 3.50%, which has remained unchanged for 12 months in a row.

Individual investors are driving the bond market rally. As of Tuesday, they have gobbled up a net 26.97 trillion won of domestic corporate bonds so far this year, up 17.9% from the same period last year.

That marked their largest-ever net purchase of domestic corporate debts for the comparable period on the domestic bond market.

By contrast, they unloaded a net 839.8 billion worth of stocks in the main Kospi market during the same period.

PRIVATE DEBT, BBB-GRADE MARKETS

According to investment banking sources, 21 out of the 23 companies that tapped the domestic bond market since the start of July have succeeded in selling as much as they wanted in new debts.

Bonds issued by companies with weak financial conditions and BBB-grade debts also whet the appetite of investors.

SK Ecoplant Co. and Lotte REIT Co., with credit ratings of A and AA, respectively, have managed to sell debts despite the grim real estate market conditions.

Debts sold by BBB-rated Hanjin Transportation Co. and AJ Networks Co., have also attracted investors.

E-Mart Inc., Shinsegae Engineering & Construction Co., SK Plasma Co., SK Shipping Co., SK Rent A Car Co. and HD Hyundai Chemical Co. have sold debts in private placements.

Non-banking financial services companies such as credit card and leasing and installment financing companies have enjoyed solid demand for their new debts.

AA plus-rated, three-year bonds issued by non-banking financial services companies have been traded at a yield of 3.3% since touching 3.392% on July 24, according to the KOFIA. The yield is the lowest point since recording 3.323% on March 31, 2022.

Investment bankers said domestic corporate bond markets are expected to remain busy through the Chuseok holiday, also known as Korean Thanksgiving, Sept. 16-18. The US Fed is slated to make a rate decision on the last day of the Chuseok holiday.

With the proceeds, they plan to repay loans or refinance them with longer-term issues. About 20 trillion won worth of corporate debts are coming due in the second half of this year.

“Lower bond yields that have priced in possible interest rate cuts are creating a favorable environment for corporate financing,” said Bae Moonsung, a senior fund manager at Life Asset Management. “More companies will tap bond markets to secure liquidity in the second half of the year.”

Write to Ik-Hwan Kim and Hyun-Ju Jang at lovepen@hankyung.com

Yeonhee Kim edited this article.