Costs Surging to Four-Month High Damp South Korean Bond Issuance

South Korean corporate bond sales slowed to the least in three weeks as the highest yields in more than four months discouraged issuers.

KCC Corp. (002380), a Seoul-based maker of paint and building products, led 300 billion won ($268 million) of offerings, the least since the five-day period ended May 17 and the slowest start to a month since January, according to data compiled by Bloomberg. Company note sales plunged to the least in 4 1/2 years in May as borrowing costs rose and new rules increasing borrowers’ reporting requirements came into effect May 6.

Benchmark yields for AA- rated companies touched 3.17 percent this week, the highest since Jan. 22, after surging last month by the most since January 2011, according to data from the Korea Financial Investment Association. In the U.S., where AA rated corporate notes offer 2.28 percent, yields are also climbing after Federal Reserve Chairman Ben S. Bernanke signaled that extraordinary stimulus could be pared if there’s a sustained economic improvement.

“Bond yields are rising so sharply amid talks of the U.S. exit from quantitative easing,” said Yoon Yeo Sam, a Seoul-based fixed-income analyst at Daewoo Securities Co. “Borrowing costs are unlikely to fall back to record-low levels because the central bank isn’t expected to cut rates further. The heyday for issuers may be over.”

STX Pan

Volatility in Korea’s corporate bond market may increase as STX Pan Ocean Co. (028670), a Seoul-based commodities ship operator, holds a board meeting today to discuss whether to apply for court receivership, Yonhap News reported today, citing unidentified regulatory officials. The nation’s financial regulator is considering measures to avoid concern spreading across the market, the newspaper reported.

STX Pan Ocean has 1.1 trillion won of bonds outstanding, 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, its first trim since October, joining global easing from Europe to Australia. BOK Governor Kim Choong Soo and his board cut interest rates to spur growth and shield the nation’s exporters against the weaker yen, which is aiding Japanese rivals.

The yield on three-year sovereign notes rose to 2.81 percent on June 5, the highest since Jan. 2. U.S. jobs data today may further encourage the Federal Reserve to begin tapering asset purchases which have spurred fund flows into emerging markets.

Jobs Data

The Labor Department reported last month that nonfarm payrolls swelled by 165,000 jobs in April, more than forecast, and the unemployment rate unexpectedly fell to 7.5 percent. It will probably say today employers added 163,000 workers in May, according to the median forecast of economists surveyed by Bloomberg News.

Federal Reserve Bank of Boston President Eric Rosengren and Federal Reserve Bank of Chicago President Charles Evans are among policy makers who’ve said they would like to see monthly payroll gains of 200,000 or more on a sustained basis before judging the labor market has improved.

BOK Governor Kim has called for advanced countries to coordinate when implementing quantitative easing exit strategies to avoid the risk of sudden capital outflows and international financial market turmoil.

Three-year corporate note yields touched a record-low 2.80 percent on March 28, data going back to 2000 show. The extra yield investors demand to own Korean company notes over similar-maturity government debt has narrowed to 36 basis points from 59 basis points a year ago.

KCC, Dongbu

KCC Corp. sold 200 billion won of five-year 3.15 percent notes and will use the proceeds to repay debt, Bloomberg data and a June 4 company regulatory filing show. Dongbu Corp. (005960), which builds hospitals, sports facilities and apartment complexes and whose commercial paper is graded A3 by Korea Ratings Corp., issued 60 billion won of 8.9 percent notes due 2014.

“We’ll use 50 billion won to repay one-year debt maturing on June 7 and the rest to pay some bills,” Ma Seung Gyun, an official in Dongbu’s finance team said, adding he didn’t think borrowing conditions were “much different” from a year ago.

A unit of DGB Financial Group Inc. borrowed 40 billion won via two-year 3.45 percent securities, the data show. Proceeds will be used to fund new businesses including leases, according to a June 4 regulatory filing.

The total amount of bonds outstanding in emerging Asia’s local-currency bond markets increased 2.9 percent to $6.7 trillion in the first quarter from the prior three months, spurred by “robust” growth in the corporate bond market and a “modest improvement” in the government sector, according to the Asian Development Bank.

Sales Pipeline

The 3.1 percent quarter-on-quarter increase in Korea was “driven primarily by 3.7 percent growth in its corporate bond market compared with growth of only 2.2 percent in the government bond market,” the Manila-based lender said in its Asia Bond Monitor released this week. Borrowing may pick up if a supplementary government spending bill is successfully implemented, it said.

Korea’s Finance Ministry unveiled a 17.3 trillion won supplementary budget in April to support exporters and revive an economy that grew last year at the slowest pace since 2009.

The won has risen 15 percent against the yen in the past six months and traded at 1,118.76 per dollar yesterday, according to data compiled by Bloomberg.

CJ Hellovision Co. and Tongyang Inc. are among companies expected to price won-denominated notes in coming days, preliminary data compiled by Bloomberg show.

Top Five Underwriter Rankings Year to Date
Company                            Market Share   Amount in Won
Woori Investment & Securities Co.  19.9%          3.13 trillion
KB Investment & Securities Co.     19.2%          3.02 trillion
Korea Investment & Securities Co.  16.0%          2.52 trillion
Daewoo Securities Co.               7.8%          1.22 trillion
Tongyang Securities Inc.            4.6%          720 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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