Korea Inc. Returns to Debt Market as Virus Fears Stay High
Korea Inc. Returns to Debt Market Even as Virus Fears Stay High
(Bloomberg) -- South Korea’s corporate bond sales are starting to revive as the government joins authorities abroad in taking steps to support credit markets roiled by the coronavirus pandemic.
Lotte Food Co. priced won-denominated bonds Tuesday, the first Korean company to do so in nearly three weeks. Other firms with strong local credit ratings including Kia Motors Corp. and Hotel Shilla Co. are planning to tap the market this month, people familiar with the matter say. The moves follow the start of debt purchases this month by a 20 trillion won ($16 billion) fund set up by the government to help stabilize the bond market.
South Korea’s credit markets are playing catch-up with counterparts in the U.S. and Europe, where massive corporate debt purchases by the Federal Reserve and European Central Bank have helped spark a boom in issuance. But even as Korean issuers return, investor concerns about the damage to the corporate sector from the virus outbreak remain pronounced: yield premiums on won corporate notes rose to the highest since 2012 this week amid a gloomy outlook for the nation’s exporters as consumer spending plunges all over the world.
“The bond stabilization fund will have short-term effects as some solid companies can benefit from it,” said Joo Tae-young, senior managing director at KB Securities Co., the top arranger of won corporate notes. “But it remains to be seen how much it will help in the long term.”
The bond rescue fund is designed to provide liquidity to the market and invests only in companies with solid ratings. It appears to have helped meet the market’s cash needs so far: the yield on three-month won commercial paper, a metric of short-term funding demand, has decreased since Friday after jumping to the highest in five years.
While Kia Motors and Hotel Shilla have high credit ratings in Korea, the automobile and accommodation sectors are among the hardest hit by the virus.
Moody’s Investors Service and S&P Global Ratings have placed Kia’s ratings on review for downgrade, citing the auto industry’s sensitivity to consumer demand and sentiment amid the pandemic.
In another sign of the challenges companies face, the Bank of Korea warned Thursday that the country’s economic performance could be significantly worse than expected at the early stages of the coronavirus pandemic. It opted to preserve policy room for now after last month’s unprecedented stimulus measures.
The government fund isn’t likely to buy company debt at very favorable rates for issuers, so spreads may continue to widen a bit, said Kim Eun-gie, credit analyst at Samsung Securities Co. Issuance of three-year bonds may increase as the fund only buys notes due in three years or less, he said.
©2020 Bloomberg L.P.