Photographer: Brent Lewin/Bloomberg

Line Beating WhatsApp in Revenue Scores Win in Korea Bond Market

  • Naver raises 150 billion won as Kakao prepares offering
  • Internet giants issue amid weakest bond market since 2013

South Korea’s online messaging services, teaching WhatsApp lessons in how to generate revenue, are also scoring victories in the bond market as investors shun the nation’s manufacturers.

Naver Corp., whose Line app is the market leader in Japan, issued 150 billion won ($129.5 million) of three-year notes on Nov. 12, paying 2.126 percent, less than the average 2.218 percent on similar corporate securities. Kakao Corp., operator of Korea’s leading messaging app KakaoTalk, plans to sell a bond next month for the first time since a merger last year.

President Park Geun Hye is pushing for a "creative economy" with more focus on startups to bolster growth the central bank forecasts will be the weakest this year since 2012 as exports flag. By selling games and emojis, Line generates average revenue per user of $3.16, KakaoTalk $4.24 and China’s WeChat $7, according to data from technology consultant Activate. That compares with just 6 cents for WhatsApp.

"The overall corporate bond market has cooled down with big manufacturers struggling," said Choi Jin Young, the Seoul-based head of the fixed income at Mirae Asset Global Investments Co., which oversees 78 trillion won of assets. "I feel relatively comfortable with Naver or Kakao because their search engines and mobile messengers become daily necessities. They’re less sensitive to the economic cycle and their bonds also have scarcity value."

Internet Appeal

While credit scores in sectors such as shipbuilding and steel are worsening, the Internet industry is among growth areas, according to Korea Investors Service, a local affiliate of Moody’s Investors Service. The trend for rating downgrades will continue in the first half of next year given continued slow economic growth and low oil prices, according to KIS. Korean companies are facing global oversupply in steel, shipbuilding and shipping, Finance Minister Choi Kyung Hwan has said.

Naver also operates Korea’s most-popular search engine, which had 77 percent of search queries in October, Nielsen KoreanClick Co. data show. Kakao’s Daum followed with 14.8 percent. Google ranked third with 8.2 percent.

Korea’s government is seeking to promote small businesses and innovation to overcome sluggish economic growth and a shortage of jobs, while wresting Korean commerce from the grip of its giant family-run Chaebol conglomerates. 

Naver, rated AA locally, received 590 billion won of orders when it priced its 150 billion won of bonds, its first offering in more than two years, according to a filing earlier this month. The company plans to use the proceeds for working capital and repaying yen-denominated loans borrowed from Sumitomo Mitsui Banking Corp. before they mature, according to its prospectus. 

Naver’s Cash

"Naver and Kakao have very solid financial structures and good operating performance," said Lee Hun Ho, Seoul-based credit analyst at Dongbu Securities Co.

Naver’s cash and cash equivalents exceeded its total debt by 864 billion won as of June 30, while the figure at Kakao was 571 billion won as of Sept. 30, according to the KIS reports.

Kakao has hired arrangers to sell about 150 billion won of three-year notes, a person familiar with the matter said Nov. 13, asking not to be identified because the details are private. It will be the company’s first issue since it merged with Daum Communications Corp. last year. Daum last sold bonds in 2005.

Kakao Plans

Kakao is considering a note offering for general corporate purposes and capital expenditure for investments, Sonia Im, a spokeswoman for the company, said in an e-mailed response to Bloomberg on Nov. 18. KIS rated Kakao’s bonds as AA- last week, the fourth-highest grade.

Domestic bond sales by Korean companies fell 23 percent this quarter to 5.17 trillion won, the lowest since 2013, Bloomberg-compiled data show. The spread for three-year AA- rated corporate bonds has widened 16 basis points to 50 this year as debt-rating downgrades outpace upgrades.

The central bank projects the economy will expand 2.7 percent in 2015 and 3.2 percent in 2016, slower than 3.3 percent last year. Exports decreased 7.7 percent in the first 20 days of November from a year earlier, Korea Customs Service data showed on Monday.

"Investors are shunning corporate bonds at risk of restructuring in industries such as shipbuilding, steel and transportation," said Kim Sang Hun, Seoul-based credit analyst at Shinhan Investment Corp., a unit of the country’s biggest financial group by assets. "Still they need to put their money somewhere, so companies like Naver and Kakao benefit."

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