Bae Woo Kyu, a 59-year-old former bank clerk in South Korea, is stocking up on long-dated bonds to prepare for retirement in a nation in the running to have the world’s oldest population.
“I’m trying not to become a burden on my children,” Bae says. “My main focus is ensuring I’ve got a sufficient nest egg. I have the national pension plan but that’s not enough.”
South Korean pension funds share Bae’s concern and their demand for longer maturities saw sales of local corporate securities due in 10 years or more almost double from a year earlier to 2.06 trillion won ($2 billion) since Dec. 31. The government priced an inaugural 30-year dollar bond this week, while LG Electronics Inc. sold 15-year won notes for the first time last month. Asia’s fourth-biggest economy will be home to the world’s oldest population by 2060, according to Statistics Korea data, overtaking Japan.
“With life expectancy rising, insurers and pension funds need more higher-yielding assets in preparation for increasing pension payments,” Lee Jae Il, a Seoul-based credit analyst at Woori Investment & Securities Co., the nation’s biggest brokerage by assets, said in a May 29 interview. “LG Electronics had no problem selling its 15-year notes.”
The government’s 30-year $1 billion sale, completed June 3 in conjunction with a 10-year euro note offering, drew four and a half times more bids than the amount of securities on offer, the Finance Ministry said. Asset managers took 55 percent and insurance companies 33 percent, a person familiar with the matter said yesterday. Some 41 percent of the notes were sold in Asia.
Invested funds under management at Korea’s life insurance companies have surged over the last five years, reaching 467 trillion won as of Dec. 31 as residents save for retirement. The yield premium of 10-year won government notes over three-year securities has fallen 21 basis points this year to 52.8 basis points on May 29, the least since October.
SK Telecom Co., South Korea’s No. 1 mobile-phone operator, sold 15-year callable bonds last month. Korea Electric Power Corp.’s affiliates have also issued notes which mature in 10 years or more this quarter.
LG Electronics raised 600 billion won selling five-, seven- , 10- and 15-year debentures priced to yield 3.299 percent, 3.515 percent, 4.041 percent and 4.441 percent respectively. The world’s No. 2 television maker doubled its latest offering after receiving 830 billion won of orders.
“We’re able to stabilize our financial structures by diversifying debt maturities,” Claire Jang, a Seoul-based spokeswoman for LG Electronics, said by phone on June 2. “Investors could choose their preferred maturities because we offered various options. Ample demand seemed to reflect investors’ confidence in our improving profitability.”
LG Electronics posted first-quarter operating profit that almost doubled analyst estimates in April as global sporting events spurred demand for large-screen sets. The company’s stock advanced 12.5 percent this year versus a 0.8 percent decline in South Korea’s Kospi Index.
The yield on AAA rated 10-year won corporate notes has dropped 12 basis points this quarter to 3.633 percent on June 3. It touched 3.578 percent on May 29, the least since last June, Korea Bond Pricing Co. show.
The finance ministry is forcing state-owned enterprises to cut liabilities, mandating the average debt-to-equity ratio at 51 public companies must be 200 percent by 2017 from 220 percent at the end of 2012. Won bond sales by state-owned companies have slumped 39 percent this year to 24 trillion won, Korea Financial Investment Association data show.
“With shrinking debt sales from state-owned enterprises, insurers and pension funds are looking for bonds that can replace them,” said Kim Hong Joong, the head of fixed-income at Samsung Asset Management Co., the country’s biggest money manager with some 128 trillion won in assets. “Investors’ search for yield is a global trend.”
Koreans will have an average life expectancy of 95.5 years by 2095, the highest in the world, according to data from United Nations released in 2013. By 2060, the elderly -- defined as anyone over 65-years old -- will make up 40.1 percent of the population, Statistics Korea data show.
The National Pension Service had 433 trillion won of assets under management as of February, compared with 236 trillion won at the end of 2008. Japan’s Government Pension Investment Fund is under similar pressure to seek higher returns.
Korea’s government plans to introduce so-called longevity bonds by 2016, the Financial Services Commission said in a December statement. Those notes’ yield will be linked to life expectancy in order to help insurers hedge risks.
Ten-year government bond yields have fallen 11 basis points since March 31 to 3.416 percent yesterday. They touched 3.330 percent May 29, the lowest in a year. The won has advanced 4.3 percent against the greenback this quarter and touched 1,017.25 per dollar May 30, the strongest since August 2008.
Official interest rates will remain low in the coming 12 to 18 months, weighing on insurers’ investment returns, Moody’s Investors Service analyst Stella Ng told reporters in Seoul on May 29.
“The slow pace of economic growth means long-term government bond yields will remain low,” Kim Ki Myung, a credit analyst at Korea Investment & Securities Co., the second-biggest arranger of local debt this year, said in a May 28 phone interview. “With interest rates also expected to stay low, more companies will be looking to sell long-dated bonds and the demand from investors is there.”