Corporate credit downgrades looming due to pandemic

A lobby of Korea Financial Investment Association in Seoul / Korea Times file

By Lee Kyung-min

An increasing number of companies are likely to have their credit downgraded due to the COVID-19 pandemic, fueling concerns that many otherwise robust firms hit by rapid, virus-triggered corporate deterioration will find it difficult to find buyers for their corporate bonds.

The grim forecast is driven further by the poor performing corporate bond market which only saw 2.7 trillion won ($2.1 billion) in issues in April, about half that of last year.

If firms cannot find buyers, their funds will dry up fast, tanking their already precarious financial position following nose-diving sales and earnings due to the pandemic.

A fast-approaching deadline for interest payments on loans could be the breaking point for some cash-strapped firms ― in the worst case scenario a full-blown bankruptcy could come in a matter of months.

Reflective of the concern is a widening credit spread, the difference in the yield between corporate and government bonds with the same maturity.

The spread between unsecured AA- corporate and three-year government bonds stood at 115 basis points, Wednesday, the highest since September 2009 when it was 116 points.

According to Korea Ratings, Korea Investors Service and NICE Investors Service, of 17 firms that had their credit downgraded in 2020, 13 were in the third week of April.

Among them were SK Energy, S-OIL, Poongsan, Lotte Shopping, Hotel Lotte, Hotel Shilla and CJ CGV, the multiplex cinema chain affiliate of CJ Group.

Fifty-one firms are likely to have their credit downgraded in the next 12 to 18 months, up 38 percent from a similar timeframe last year when the number was 37.

Fourteen firms are on “watch lists” for possible downgrades in the next three months, up 36 percent from nine the year before.

While ratings require review of corporate earnings among overall financial performance of about three years, the virus-sparked hardship could fast become an industry-wide crisis, according to Seoul National University economist Lee In-ho.

“Some firms failed to find buyers for their bonds in a recent pre-sale bidding following rating downgrades, an indication that institutional investors are reluctant to take on risks amid an already volatile financial market with developments likely to become dimmer for the foreseeable future,” he said.

The only silver lining is how many bonds will be bought by the financial authorities, in line with the latest economic relief package announced Wednesday.

The Financial Services Commission said it plans to expand its primary collateralized bond obligations program by 5 trillion won, adding that government-run special purpose vehicles (SPVs) will buy commercial papers, corporate bonds and short-term debentures issued by low-credit rated firms.

According to Korea Financial Investment Association, 6.8 trillion won in corporate bonds were issued in January. This jumped to 12.3 trillion won in February but plummeted to 5.1 trillion won in March.

The February figure was explained by firms taking a proactive approach in finding as many buyers as possible before COVID-19 began to take a toll on their bottom lines.

But the market sentiment took a dive in March as the virus became a global pandemic.