Rate-Cut Bets Delay Won Bond Sales in Slowest Start Since 2006

South Korean corporate bond sales dwindled last month in the slowest start in seven years after the currency’s 8.3 percent rise against the U.S. dollar in 2012 hampered the economy, bolstering expectations for further declines in borrowing costs.

Issuance fell 73 percent to 2.26 trillion won ($2.1 billion) in January compared with the previous year and 50 percent less than the monthly average for 2012, according to data compiled by Bloomberg. LG Household & Health Care Ltd., Asia’s second-biggest maker of household products by market value, led sales with 500 billion won of three- and five-year debt, the data show.

The won surged the most among Asia’s 11 major currencies in 2012, crimping economic expansion and opening the door for central bank stimulus, which could drive company debt yields lower. Export growth from Asia’s fourth-biggest economy may be capped this year as Japanese Prime Minister Shinzo Abe’s campaign to drive down the yen makes his nation’s cars and electronic goods relatively cheaper.

“The trend in the won is a factor that enhances the likelihood of another rate cut,” said Byun Jeong Hye, a credit analyst at Shinhan Investment Corp., the fifth-biggest underwriter of won-denominated bonds last year. “Issuance will probably increase in February and March compared with January.”

Byun predicts the benchmark seven-day repurchase rate will be cut in April. Yields on three-year corporate notes rated at AA- fell 16 basis points to 3.13 percent last month, the biggest monthly decrease since August and near the lowest in Korea Financial Investment Association data going back to 2000. Average yields fell to a low of 3.12 percent on Jan. 25.

Borrowing Costs

The Bank of Korea held borrowing costs unchanged at 2.75 percent last month, following a 25-basis point reduction in October. The central bank will reduce the rate by a further 25 basis points in the second quarter, according to the median estimate of 12 economists in a Bloomberg survey.

Overseas shipments by exporters such as Samsung Electronics Co. and Hyundai Motor Co. account for nearly half of Korea’s gross domestic product.

“This currency trend, which will have a negative impact on South Korea’s economy, is the main reason why the bond rates aren’t able to rebound,” said Hwang Won Ha, a Seoul-based credit analyst at HMC Investment Securities Co., the securities unit of Hyundai Motor Group. “It seems companies are hurrying to issue bonds in the following months as there’s expectation that the economy will improve in the second half of the year.”

Growth Forecasts

South Korea’s economy expanded less than analysts forecast in the fourth quarter. Gross domestic product grew 1.5 percent from a year earlier, unchanged from the expansion in the third quarter, the central bank said Jan. 24. The median estimate of 12 economists surveyed by Bloomberg News was for a 1.8 percent expansion.

The central bank lowered its forecast for the nation’s 2013 growth last month to 2.8 percent from an October estimate of 3.2 percent. The economy will expand 3.8 percent next year, according to the projection. Lee Sang Jae, a senior economist at Hyundai Securities Co. in Seoul, said that an interest-rate cut is possible if growth falters on weak sentiment and a strong currency.

LG Household & Health Care sold 210 billion won of January 2018 bonds priced to yield 3.2 percent and 290 billion won of January 2016 notes paying 3.1 percent, according to data compiled by Bloomberg. The Seoul-based company sold three-year securities in January 2012 to yield 3.92 percent, the data show.

Lotte Engineering

GS Engineering & Construction Corp., the only issuer this week, sold 320 billion won of February 2016 notes priced to yield 3.53 percent, and 60 billion won of February 2018 debentures paying 3.66 percent, according to Bloomberg data. The Seoul-based company last sold bonds in October, and has 1.6 trillion won of debt outstanding, the data show.

South Korean companies sold 54.8 trillion won of bonds last year, below the 57.3 trillion won of issuance in 2011, according to the data compiled by Bloomberg.

Lotte Engineering & Construction Co. and SK Engineering & Construction Co. are among companies planning to sell bonds in coming weeks, according to preliminary data compiled by Bloomberg.

Top Five Underwriter Rankings Year to Date

Company                          Market Share    Amount in Won
KB Investment & Securities Co.     33.8%         763.3 billion
Korea Investment & Securities Co.  17.2%         388.1 billion
Woori Investment & Securities Co.  14.1%         318.6 billion
Hyundai Securities Co.              6.8%         153.4 billion
NH Investment & Securities Co.      6.2%         140.0 billion
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