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Real estate PF risks to determine direction of credit market in H2
By Anna J. Park
The Korean debt market is showing signs of a recovery with investor appetite for corporate bonds rising during the first half of this year. Bonds issued by top-rated companies and even by some businesses with lower credit ratings succeeded in attracting hundreds of billions of won in investments during the first half of this year.
Hotel Lotte, whose bonds are rated AA-, decided to increase the size of its debt issuance scheduled on Friday to 163 billion won ($125 million) from 120 billion won. The increase is due to heated investment demand that exceeded the initial debt issuance target by about four times.
Hanwha Solutions, whose bonds are also rated AA-, is also considering expanding the amount of debt issuance by up to 300 billion won. The company originally planned to issue 150 billion won worth of bonds next Tuesday, but it attracted over 800 billion won in demand during the book-building process.
What is noteworthy is that the two companies already issued bonds earlier this year and succeeded in raising 300 billion won each. Actually, many other firms also issued large amounts of debt twice during the first half of this year.
POSCO Future M attracted a total of 700 billion won in investments through corporate bond issuances during the first half, succeeding in issuing 400 billion won worth of debt in February and 300 billion won in April. SK Inc. also raked in nearly one trillion won ― 390 billion won in February and 600 billion won in May ― during the first half of this year from the credit market.
According to data compiled by Hyundai Motor Securities, the cumulative amount of debt issued by companies with AA ratings stood at 5.8 trillion won as of the end of May. Firms with A ratings also issued a net total of 800 billion won worth of bonds during the same period. That contrasts with last year, when the net debt issuance by firms with AA ratings and A ratings each stood at -4.4 trillion won and -6 trillion won. When a net debt issuance shows a minus figure, it means the amount of money firms paid to redeem their debts exceeded the amount they received by issuing new bonds.
Contrary to the revived investor sentiment in the domestic bond market, Korea Real Estate Investment & Trust (KOREIT) failed to meet its debt issuance targets. In February, the A0-rated firm ended up attracting 56 billion won, falling short of its target of raising 80 billion by issuing debt. In May, it attracted only 33 billion won worth of demand despite its goal of raising 70 billion won by issuing bonds. Market watchers say that lingering concerns over a recession are behind such contrasting performances of bond issuances.
Still, the overall credit market in the country is showing an obvious improvement in stability compared to the second half of last year. As of early this month, the interest rate on AA- three-year corporate bonds stood at 4.244 percent. As the rate for three-year government bonds stands at 3.436 percent, the credit spread ― the gap between interest rates of government bonds and corporate bonds ― stood at 80.8 basis points (1bp=0.01 percent).
The figure is down considerably from last November when the credit spread climbed to 157.4 basis points amid a severe credit crunch. The lowered credit spread signifies a stabilizing level of investor confidence in corporate bonds.
As the local credit market became more stable, retail investors spent a total of 15.9 trillion won to purchase either government or corporate bonds in the first half, up almost five times compared to the same period of last year.
However, analysts advise investors to remain cautious about lingering risks in the debt market.
"It is expected that a smaller amount of corporate bonds will be issued during the second half than the first half. What could potentially impact the credit market is whether the real estate project financing issue could achieve a soft landing later this year," Kim Ki-myung, a credit analyst at Korea Investment & Securities, said.
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