Korea Corporate Bond Sales Halt Ahead of Central Bank Cut

Corporate bond sales in South Korea ground to a halt this week after the busiest month in six in April as companies put borrowing plans on hold ahead of an interest rate decision.

No companies have sold won-denominated bonds since May 6 and sales this month total 340 billion won ($308 million) compared with 1.44 trillion won the same period of April, 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 yesterday, its first cut since October.

“The rate cut lowers companies’ financing costs so we can expect bond sales to pick up,” said Kim Ki Myung, a credit analyst at Korea Investment & Securities Co., the third-ranked arranger of note sales this year.

Yields on three-year corporate notes rated at AA- were last at 2.92 percent, near a record-low 2.80 percent reached on March 28, data from the Korea Financial Investment Association going back to 2000 show. Governor Kim Choong Soo and his board cut borrowing costs as a weak yen dims the outlook for the nation’s exports and record household debt weighs on consumption. Only six of 20 economists surveyed by Bloomberg News predicted the move, while the rest forecast no change.

Yield Demand

Japan’s currency has slid almost 11 percent against the won since Dec. 31, harming South Korean exporters’ global price competitiveness. Lawmakers on May 7 passed a 17.3 trillion won supplementary budget proposal to support the economy, including special loan programs for exporters and smaller contractors building overseas plants.

The yield on three-year sovereign notes rose 8 basis points, or 0.08 percentage point, this week to 2.55 percent today from an all-time low of 2.44 percent May 2. The yield on 2.75 percent government bonds due March 2018 is up 9 basis points to 2.62 percent.

“Investor demand for longer-term, high-yielding bonds is increasing” because government bond yields remain low, Tongyang Securities Inc. analysts led by Yoo Tae In wrote in a report e-mailed May 6. “As for notes rated below A, investors will take an issuer’s credit status into account in making their decision.”

Artone Paper Manufacturing Co. is among companies planning to sell won-denominated notes in coming days, preliminary information compiled by Bloomberg show. The maker of printing and art paper for shopping bags and advertising catalogs expects to sell 35 billion won of secured five-year notes next week.

More Clarity

GS Caltex Corp. has issued the most local-currency bonds this month, borrowing 300 billion won in a two-part sale May 2. South Korea’s second-biggest oil refiner has the equivalent of about $6.2 billion in notes outstanding, having sold 600 billion won of securities this year, Bloomberg data show.

The extra yield investors demand to own Korean company notes over similar-maturity government debt has narrowed to 36 basis points from 66 basis points a year ago.

Companies tend not to “sell any corporate bonds or even bid on them ahead of a rate decision, regardless of whether the central bank decides on a hold or a cut,” Kim Eun Gie, a credit analyst at Hanwha Investment & Securities Co. said ahead of yesterday’s central bank decision. “We’ll see more credit market activity as early as next week after some clarity.”

A new regulation which took effect on May 6 and requires companies to submit the same amount of documentation for private bond deals as for public sales may also boost issuance, Korea Investment & Securities’ Kim said.

International Sales

The government revised its policy to require companies to report sales of short-term bonds that mature more than a year after issuance, the Financial Supervisory Service said in an April 24 statement on its website. The revision was made to ensure transparency in short-term capital markets and prevent regulatory arbitrage in corporate bond trades, the FSS said.

International bond sales in Korea surged to $1.56 billion this month compared with $155 million in the same period of April, led by Export-Import Bank of Korea and Korea National Oil Corp., according to data compiled by Bloomberg. KNOC sold $630 million of notes due 2018 on May 7 at a 145 basis-point spread over similar-maturity Treasuries.

No asset-backed securities have been sold this month. Offerings of the notes backed by loans, leases or receivables against assets totals 6.9 trillion won this year, the data show.

Top Five Underwriter Rankings Year to Date
Company                            Market Share   Amount in Won
Woori Investment & Securities Co.  20.3%          2.88 trillion
KB Investment & Securities Co.     19.3%          2.74 trillion
Korea Investment & Securities Co.  16.6%          2.36 trillion
Daewoo Securities Co.               8.6%          1.22 trillion
Shinhan Investment Corp.            4.5%          645 billion
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