Value context and insight. lkm@koreatimes.co.kr
Net corporate bond issuance plunges amid virus
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By Lee Kyung-min
By Lee Kyung-min
The net issuance of corporate bonds plunged in March as a growing number of firms fail to find buyers amid the market turbulence caused by the COVID-19 outbreak, data showed Sunday.
Of particular concern is a widening credit spread, the difference in yield between corporate bonds and government bonds of the same maturity.
This indicates that the relatively lower quality, riskier corporate bonds compared to traditionally safer government-issued bonds are having greater difficulties in finding buyers, in turn making it more difficult for firms to borrow.
Corporate bonds give the spread, also referred to as bond spread or default spread, to compensate buyers for taking risks by investing in low-rated firms.
According to the Korea Financial Investment Association (KFIA), the net issuance of corporate bonds excluding asset-backed security (ABS) stood at over 1.07 trillion won ($859 million) from March 1 and 20.
The outstanding corporate bond volume in the same period was over 3.96 trillion won of which over 2.89 trillion won had been redeemed.
The net amount is less than half of over 3.01 trillion won a year earlier.
Measured on a month-on-month basis, the volume is far smaller given a net of over 6.22 trillion won in corporate bond issuance in February.
Corporate borrowing will have to brace for the worse in April, given the wider-than-expected mismatch between the supply and demand of corporate bonds.
The spread between 3-year unsecured corporate bonds rated AA- and 3-year government bonds was 83.8 basis points, Feb.20, the widest since February 2012, when it stood at 85 basis points.
“Firms do not issue as many bonds in March when major corporate events are scheduled including shareholders' meetings as well as earnings reports,” an industry official said.
The credit spread is expected to widen in April, given a limited number of buyers that are willing to buy bonds issued by firms in need of borrowing.
Further compounding the problem is the record-high number of bonds set to mature in April.
The KFIA data showed of over 50.8 trillion won worth of corporate bonds, over 6.5 trillion won will mature next month.
This is the largest April amount since the association began compiling related data in 1991. It is 10.8 percent more compared to 5.91 trillion won a year earlier.
More corporate defaults are feared if firms fail to convert the maturing bonds into newly issued ones, thereby essentially extending the maturity.
“Investors will remain reluctant to buy corporate bonds for the time being due to elevated fears of a possible downgrade in ratings among some firms hit by the coronavirus,” the official said.
According to the Financial Supervisory Service (FSS), the issuance of corporate bonds has been on the rise over the past few years, due in large part to low interest rates.
Many financial services firms including banks, kept buying the high-yield bonds in hope of high returns.
The figure rose to 170.1 trillion won in 2019, up from 160.9 trillion won in 2018. It was 144.2 trillion won in 2017, up from 109.8 trillion won in 2016.