The Bank of Korea raised its benchmark interest rate, triggering funding difficulties for lower-rated Korean companies as corporate bond issuance became harder amid contracting institutional investor demand and rising borrowing costs. As of May 16 afternoon session, AA- 3-year unsecured corporate bond yields stood at 4.544%, up 108.5 basis points from 3.459% on January 2, while BBB- 3-year bond yields reached 10.345%, up 104.2 basis points from 9.303% at the start of the year, according to the Korea Financial Investment Association. The rate hike added upward pressure on market interest rates, compounding challenges for lower-rated firms already facing reduced institutional demand due to bond valuation losses at securities firms. Securities and asset management firms have experienced widespread bond portfolio losses as 3-year government bond yields rose from 2.95% at the end of last year to around 3.8% currently, an increase of approximately 90 basis points, according to an unnamed securities firm executive.
Corporate Bond Yields Rise Amid Rate Hike
AA- 3-year unsecured corporate bond yields closed at 4.544% on May 16 afternoon session, down 1.9 basis points from the previous day and down 3.8 basis points from the May 14 high of 4.582%, but up 108.5 basis points from the January 2 level of 3.459%, according to the Korea Financial Investment Association. BBB- 3-year bond yields stood at 10.345% on May 16, down 2.0 basis points from the previous day and down 4.2 basis points from the May 14 high of 10.387%, but up 104.2 basis points from the January 2 level of 9.303%. Bond yields move inversely to prices, meaning the yield increases reflect price declines.
Securities Firms Face Bond Valuation Losses
Securities firms and asset management companies have experienced widespread bond portfolio valuation losses as 3-year government bond yields rose from 2.95% at the end of last year to around 3.8% currently, an increase of approximately 90 basis points, according to an unnamed securities firm executive. The executive stated that the losses have caused institutional demand for corporate bonds to weaken. The securities and asset management industry has maintained a cautious approach to bond investment throughout the year due to bond price declines causing valuation losses.
BBB-Rated Companies Struggle with Bond Issuance
JR Global REIT, rated BBB+, failed to repay 40 billion won in electronic short-term bonds in April, with Korea Investment & Securities as the underwriter. Joongang Ilbo defaulted after failing to meet an early repayment request for 22 billion won in commercial paper held by Hanyang Securities. Hanjin, rated BBB+, received only 19 billion won in orders for a 20 billion won 1-year bond offering on May 14, leaving 1 billion won unsold. Donghwa Enterprise, also rated BBB+, failed to receive any orders for a 40 billion won bond issuance in May. An unnamed investment banking industry source stated that individual investors who purchased lower-rated high-yield bonds have suffered losses from recent corporate defaults, and institutional investors are cautious about lower-rated bond investments due to losses and public opinion concerns.
FAQ
What happened to Korean corporate bond yields after the Bank of Korea rate hike?
AA- 3-year unsecured corporate bond yields stood at 4.544% as of May 16 afternoon session, up 108.5 basis points from 3.459% on January 2, while BBB- 3-year bond yields reached 10.345%, up 104.2 basis points from 9.303% at the start of the year, according to the Korea Financial Investment Association.
Why are BBB-rated Korean companies struggling to raise funds?
BBB-rated companies face reduced institutional investor demand due to bond valuation losses at securities firms and weakened retail investor appetite following recent corporate defaults. Hanjin raised only 19 billion won out of a 20 billion won target on May 14, while Donghwa Enterprise failed to receive any orders for a 40 billion won bond issuance in May.
Which Korean companies defaulted or failed bond issuances recently?
JR Global REIT failed to repay 40 billion won in electronic short-term bonds in April, with Korea Investment & Securities as the underwriter. Joongang Ilbo defaulted on 22 billion won in commercial paper held by Hanyang Securities. Hanjin left 1 billion won unsold in a May 14 bond offering, and Donghwa Enterprise received zero orders for a 40 billion won issuance in May.
