Korea Bond Sales Fall 46% as Regulator Shifts Power to Investors

South Korea’s corporate bond sales declined to the lowest amount in a year and a half after the government allowed investors to have more power in setting the pricing for new securities.

Korea Electric Power Corp. and Hyundai Merchant Marine Co. sold fewer won-denominated notes last quarter as issuance fell 46 percent to 10.36 trillion won ($9.06 billion) from a record 19.2 trillion won in the first three months, according to data compiled by Bloomberg. Yields on AA rated corporate debt dropped to 3.69 percent in June, the lowest since November 2004, according to Koscom Corp. prices. Comparable U.S. company costs are 1.69 percent, Bank of America Merrill Lynch indexes show.

Sales declined after the country’s top financial regulator introduced a new rule on pricing to bring Asia’s second-largest bond market outside of Japan into line with global standards. Now that issuers have got used to it, sales may increase this quarter as the central bank readies for its first interest-rate cut in three years, following China and India, according to Woori Investment & Securities Co., the second-biggest underwriter.

“The new rule, prior to its implementation, was seen as unfavorable by issuers,” Kim Dae-Young, head of debt products at Woori Investment, said in a June 26 interview in Seoul. “They have now become accustomed to the new system. The benchmark rate will go down, which will bring down the spread, and issues will pick up as the borrowers would want to take advantage of that.”

Investor Demand

Since April 17, borrowers have been required to gauge investors’ level of demand and desired pricing for a sale. Before the regulation came into effect, buyers had to accept the pricing terms set by the companies and arrangers without having much input, Woori Investment’s Kim said.

“The main reason behind the drop in sales is the new rule. Companies pre-funded a lot of capital before it took effect,” Byun Jeong Hye, a credit analyst at Shinhan Investment Corp., said in a June 28 phone interview. “Companies have maturing debt to refinance, which is the main purpose for borrowing right now, as they are shunning new investments and mergers and acquisitions amid an uncertain business environment.”

South Korea cut its growth estimate for this year and announced 8.5 trillion won of spending to support the economy as officials predict a protracted European debt crisis. M&A activity declined 26 percent to $11.7 billion last quarter, data compiled by Bloomberg show.

Bank of Korea

The Bank of Korea needs to reduce the official bank rate soon to boost the country’s economic recovery in the second half, Woori Investment said in a June 15 report. Policy makers kept the benchmark interest rate at 3.25 percent for a 12th straight month on June 8. China cut its benchmark lending and deposit rates for the first time since 2008 on June 7, and India’s central bank in April lowered its key rate.

Financial Services Commission Chairman Kim Seok Dong is trying to boost the competitiveness of the South Korean investment banking industry. He took office in January 2011 and pledged deregulation, such as hedge-fund creation, while demanding brokerages take greater responsibility for protecting investors when underwriting securities.

“We’re closely monitoring how bond sales are done to make sure the rules are followed,” Kim Mi Kyung, a spokeswoman at the regulator, said in an e-mailed comment June 29.

Underwriter Role

“Now that the new rule is in place, we have to take on more of a role so that both buyers and sellers are on a level playing field,” Jung Il Mun, a senior executive managing director at Korea Investment & Securities Co., the third-largest underwriter this year, said June 29.

Bond sales increased in June after a lull in April and May, the data show. Hyundai Merchant, Korea’s biggest shipping company by market value, offered 330 billion won of 5.3 percent five-year bonds at 90 basis points less than the 60 billion won of similar-maturity 6.2 percent notes it sold in March, according to data compiled by Bloomberg.

“It will take some time for the new rule to settle down, but the market will eventually stabilize,” said Kim Youngsung, head of fixed income at Samsung Asset Management Co., Korea’s biggest fund manager, which oversees 124 trillion won. Samsung Asset favored corporate debt for most of the year, but reduced holdings as the premium over government debt began to widen in June, Kim said.

Bond Premiums

The premium investors seek to own three-year AA rated corporate bonds rather than similar-maturity government notes fell to 41 basis points May 29, the narrowest since September 2007, according to Koscom, which compiles data from the exchange, the investment association and ratings companies. The spread widened 7 basis points to 49 basis points in June, the data show.

South Korea’s top 10 issuers, who sold a total of 8.92 trillion won of notes in the first half, have 7.8 trillion won of debt maturing through December, according to data compiled by Bloomberg. State-owned utility Korea Electric Power, the biggest borrower this year, has the equivalent of 2.2 trillion won of debt outstanding in the second half, the data show.

“With many companies needing refinancing on their maturing bonds, I expect issuance will pick up in the second half,” Hwang Jae Hong, who oversees 12 trillion won as head of fixed income at UBS Hana Asset Management Co., said in a June 18 interview in Seoul. “The bottom line is that demand for corporate bonds still exceeds supply.”

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