South Korean Corporate Bond Sales Pick Up After Rate Reduction

Corporate bond sales in South Korea picked up after a pause last week when the central bank unexpectedly cut borrowing costs.

Three issuers raised a total of 165 billion won ($148 million) this week, according to data compiled by Bloomberg. The Bank of Korea lowered the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent on May 9, joining global easing from Europe to Australia.

Governor Kim Choong Soo and his board’s decision to cut borrowing costs for the first time since October came as a weak yen dims the outlook for the nation’s exports and record household debt weighs on consumption. Yields on three-year corporate notes rated at AA- were last at 2.93 percent after hitting a record-low 2.80 percent on March 28, data from the Korea Financial Investment Association going back to 2000 show.

“We may see more bond sales in coming weeks on lower borrowing costs but only in a limited scale,” said Peter Park, fixed-income analyst at Woori Investment & Securities Co. in Seoul. “I believe the monetary easing cycle is over here unless the yen slides further to undercut our exports severely.”

The rate cut decision was opposed by one board member. Central bank Governor Kim said on May 9 that fiscal and monetary stimulus will help increase 2013 growth to 2.8 percent from the BOK’s April forecast of 2.6 percent. Monetary conditions are “accommodative,” he said.

Issuance Restrained

Artone Paper Manufacturing Co. (007190), which produces paper for books and magazines, sold 35 billion won of five-year bonds to repay short-term borrowings to KB Bank, according to the company’s regulatory filing.

“With another rate cut by the central bank, the overall borrowing costs are considerably low, which will help our overall financing costs by about 5 billion won this year,” Artone’s finance team head Go Jeoung Han said in a phone interview on May 16.

Doosan Engineering & Construction Co. (034020) raised 70 billion won this week, Bloomberg-compiled data show. AJ Rent A Car Co. (068400) issued 60 billion won of three-year notes to repay debt. The nation’s largest vehicle rental service provider plans to diversify business using its client networks, according to its regulatory filing.

“There are too many uncertainties in the economic outlook and global monetary and currency policy directions, which will restrain more aggressive bond issuance here,” Woori’s Park said. “Companies rush to sell debt when they see a credit squeeze or when interest rates are expected to jump suddenly, but neither of those cases applies now.”

Negative Pressure

Japan’s currency has slid 19 percent against the won in the past six months, hurting South Korean exporters’ global price competitiveness. To protect Asia’s fourth-largest economy from a slowdown, the government unveiled a 17.3 trillion won supplementary budget and added 11 trillion won of financial support for exporters. The Bank of Korea expanded its special loan programs for small firms by 3 trillion won to 12 trillion won.

Negative rating actions for Korean private-sector corporate issuers will continue to outnumber positive ones over the next 12 months, according to a Moody’s Investors Service statement on May 15.

“The main reasons for the pressure will be weak growth in key export markets, subdued domestic consumer spending, the Korean won’s appreciation against the dollar and yen, and some companies’ aggressive investment strategies,” Chris Park, a Moody’s Vice President and Senior Credit Officer, said in the statement. The proportion of Korean non-government-owned companies with negative ratings outlooks rose to 38 percent as of the end of April from 32 percent at the end of 2012, he said.

Bond Pipeline

The yield on three-year sovereign notes rose 1 basis points, or 0.01 percentage point, this week to 2.56 percent from an all-time low of 2.44 percent May 2.

Hyundai Steel Co. and Sungwoo Hitech Co. are among issuers planning bond sales in coming days, preliminary information compiled by Bloomberg show.

The extra yield investors demand to own Korean company notes over similar-maturity government debt has narrowed to 37 basis points from 61 basis points a year ago.

International bond sales from Korea totaled $1.75 billion this month, led by Export-Import Bank of Korea and Korea National Oil Corp., according to data compiled by Bloomberg.

Top Five Underwriter Rankings Year to Date
Company                            Market Share   Amount in Won
Woori Investment & Securities Co.  20.1%          2.88 trillion
KB Investment & Securities Co.     19.3%          2.77 trillion
Korea Investment & Securities Co.  16.9%          2.43 trillion
Daewoo Securities Co.               8.5%          1.22 trillion
Tongyang Securities Inc.            4.7%          682 billion

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

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