Korea Inc. Sells Most Bonds Since '12 as Slow Economy Looms

(Bloomberg) -- South Korean companies are rushing to sell bonds to lock in the cheapest borrowing costs in two-and-a-half years, amid concern that a slowing economy could worsen their credit quality and increase interest rates down the line.

Won-denominated corporate debt sales have jumped 17 percent to 13.6 trillion won ($12.1 billion) so far this year, the biggest total since 2012, according to Bloomberg-compiled data. The latest mammoth deal came from LG Chem Ltd., which is set to issue 1 trillion won of bonds in four tranches on Wednesday. Korea Ocean Business Corp., the state-run company established last year, also plans to sell 500 billion won of bonds this month in its debut offering.

Reflecting investor demand for won company notes, yield premiums on such debt have dropped to the lowest since 2016. But Korean firms might not be able to take advantage of the low borrowing costs for long: their creditworthiness could be hurt as the economy slows, according to Shinhan Investment Corp. The Bank of Korea trimmed the growth outlook for the year as the jobless rate hit the highest level in nine years in January and exports tumbled in the wake of the U.S.-China trade war.

“People will see as time goes by that corporate earnings aren’t in good shape overall, and spreads may widen accordingly,” said Kim Sang-hun, a credit analyst at Shinhan Investment in Seoul.

The yield premium on three-year AA- rated corporate bonds has tightened 10 basis points since the end of last year to 35, the lowest since 2016, according to Bloomberg-compiled data. Kim forecasts that the spread may rebound in May, when ratings firms start periodic reviews of debt scores and some companies will be downgraded.

See also: Yield Hunger Fuels Record Korean Corporate Won Bond Orders

Some lower-rated firms have also benefited from investors’ hunt for yield. Spreads on BBB+ rated company securities fell to the lowest level since 2015, Bloomberg-compiled data show.

Builders with weaker credit scores, whose debt was avoided by many investors in the past, also sold bonds at favorable rates recently. Taeyoung Engineering & Construction Co., Lotte Engineering & Construction Co. and Hanwha Engineering & Construction Corp. all increased the size of their bond deals and cut borrowing costs this month.

While the extra yield makes these lower-rated notes appealing to investors, such demand may fade, according to Park Jin-young, a credit analyst at Hyundai Motor Securities Co. in Seoul. “If there are more visible signs of a slowing economy, demand for solid ratings will increase as people seek safety,” she said.

To contact the reporter on this story: Kyungji Cho in Seoul at kcho54@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

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