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Companies are reducing corporate bond procurement due to steep interest rate hikes. This is because even the highest procurement rate has jumped more than 1 percentage point in eight months since the end of last year, adding to the burden.
Companies are still blocking urgent funds with bank loans that are cheaper to raise compared to corporate bond rates. However, it is pointed out that the problem has not been fundamentally resolved, with corporate bonds that the teenage groups have to pay back within the next year alone worth 46.9564 trillion won (25.3% of the total remaining amount). This is because if market interest rates rise, bank loan rates will also rise.
According to the Korea Financial Investment Association on the 25th, the credit spread (based on AA-3 years), which refers to the difference in interest rates between corporate bonds and treasury bonds, was 0.686 percentage points as of the day, larger than the end of last year (0.4 to 0.5 percentage points). The expansion of the spread means that the risk premium that investors demand for corporate bonds has increased, which means that investment demand has shrunk and the sense of alert over credit risk has increased.
Behind the rise in procurement rates is the Bank of Korea’s tightening stance. On the 16th of last month, the Bank of Korea raised its key interest rate from 2.50% to 2.75% per annum. Bank of Korea Governor Shin Hyun-song said shortly after the Monetary Policy Committee, “We will respond until we are confident that the inflation rate has fallen steadily to the target level.”
While the benchmark interest rate rose slowly, the interest rate on treasury bonds reflected the rate hike, increasing the burden on companies to issue corporate bonds. Lee Kyung-rok, a researcher at Shinyoung Securities, said, “I don’t think this trend will change much for the time being,” but predicted, “If the benchmark interest rate rises once or twice, including in July this year, there is a possibility that the balance between the corporate bond market and bank loans will be readjusted from then on.”
In a recent survey of 204 non-financial companies conducted by the Korea Chamber of Commerce and Industry, 43.6% of the companies used commercial banks to raise funds in the past year, while only 19.6% said they used corporate bond issuance.
According to the Financial Supervisory Service, the amount of general corporate bonds issued in the first half of the year was 25.9052 trillion won, down 31.5% from the previous year (37.83 trillion won). On the other hand, according to the Bank of Korea, banks’ loans to large corporations increased by 25.5 trillion won in the first half of this year alone, including 12 trillion won in the first quarter and 13.5 trillion won in the second quarter, already exceeding last year’s annual increase (20.4 trillion won). While corporate bond issuance has decreased by more than 10 trillion won, bank loans have more than doubled.
Analysts say that changes in the banking sector’s business stance also accelerate this trend. According to Shinyoung Securities, banks are turning to the corporate loan market to secure demand for large companies from the corporate bond market as financial authorities tighten household loan regulations, including the expansion of stress DSR (total debt repayment ratio).
“While demand for corporate bonds has shrunk as interest rates continue to rise, banks are rather active in corporate loans as they curb household loans and induce loans toward productive finance,” an asset manager official said. “There is a natural transfer of funds from corporate bond issuance to bank loans.”
In fact, the balance of loans to large corporations by the five major banks increased to 190 trillion won in June this year, and the growth rate reached about 10% compared to the previous quarter, showing a clear acceleration. Choi Sung-jong, a researcher at NH Investment & Securities, said, “The issuance is limited due to the burden of issuers on high interest rates despite the resumption of corporate bond demand forecasts this month,” adding, “The preference for procurement through bank loans and short-term fund markets will continue for the time being rather than corporate bonds due to high market interest rates.”
Among the top 10 groups, Hyundai Motor Group has the largest amount of corporate bonds to be paid back within a year. Of the 14.11 trillion won to be paid back, credit companies such as Hyundai Capital, Hyundai Card and Hyundai Commercial account for 82 percent with 11.63 trillion won.
SK (8.8688 trillion won), Lotte (5.851 trillion won), Samsung (5.1 trillion won), and LG (3.865 trillion won) have the largest amount of maturity. There are a lot of supplies to be refinance, but interest rates are likely to rise further. In terms of the ratio to the balance, Hanwha (32.5%) and POSCO (32.0%) were the most burdensome, while HD Hyundai (17.4%) was relatively relaxed.
The burden of interest rates is expected to increase in the future. Stock industry sources predict that the benchmark interest rate will be raised further by the Monetary Policy Committee on the 27th, reaching 3% per year.
Kim Myung-sil, a researcher at iM Securities, said, “In August, consumer price growth is likely to rebound to the mid-3% range due to low base and pressure on oil prices and demand,” adding, “Rather than delaying the base rate hike to October, it is advantageous to check the cumulative tightening effect from the fourth quarter after conducting it in August when the economy can endure.”
[Reporter Oh Goes Back]