Decimated Won Bond Sales Add Cash Shortages to Korean Challenges

South Korea’s corporate bond sales this month have plunged to about a tenth of offerings a year ago, as borrowing costs near a 10-month high hamper growth prospects of Asia’s fourth-largest economy.

Sales total 322 billion won ($286 million) since June 30 versus 3.01 trillion won a year earlier and 1.25 trillion won last month, according to data compiled by Bloomberg. Doosan Engineering & Construction Co. leads expected sales this week of 182 billion won, compared with a weekly average this year of about 588 billion won, the data show.

Bank of Korea Governor Kim Choong Soo held benchmark rates unchanged for a second straight month last week as he weighs signs of a global economic recovery against the need to curb spiraling yields. Corporate note sales slid to the least since September 2008 last quarter, mirroring a rout in global markets after Federal Reserve Chairman Ben. S. Bernanke signaled the central bank’s bond-buying program could be tapered as early as this year.

“Sales may remain in the doldrums for a while,” said Min Dong Won, a credit analyst at Seoul-based Hyundai Securities Co. “Market sentiment remains far from any recovery and is weighed down by concerns over external risks that Korea can’t control such as the Fed tapering stimulus and China’s slowdown.” China is South Korea’s biggest trading partner.

Capital Squeeze

Average yields on three-year corporate notes rated AA- were unchanged this week at 3.33 percent as of July 18, according to data from the Korea Financial Investment Association. The rate touched 3.48 percent on June 24, the highest since August 2012.

The country’s Financial Services Commission unveiled on July 8 a plan to sell so-called primary-collateralized bond obligations, or PCBO, to bolster funding for companies facing a financing squeeze as economic growth slows.

Doosan Engineering & Construction, a Seoul-based provider of civil engineering and architectural services, sold 100 billion won of 7.8 percent two-year notes on July 16, Bloomberg-compiled data show. The company, part-owned by Doosan Heavy Industries & Construction Co., will use the proceeds mostly for refinancing, said Harry Jun, general manager in the investor relations department.

“We issued the bonds just in case the capital squeeze will worsen, even though we have enough cash for refinancing,” Jun said. “Yields are likely to stay at current levels for the time being since the government is issuing primary-collateralized bond obligations and the Bank of Korea is keeping rates steady.”

Sentiment Low

AJ Rent A Car Co., an auto rental company, issued 32 billion won of 3.6 percent notes due 2015 on July 15, the data show. It plans to use the money for working capital, according to a July 16 regulatory filing.

While the FSC’s plan to provide refinancing support to spur issuance may offer “a short-term boost, sentiment still remains too low for companies to borrow by simply relying on the possibility of government aid,” Hyundai Securities’ Min said.

Bank of Korea Governor Kim Choong Soo and his board kept the seven-day repurchase rate at 2.5 percent on July 11. Kim afterward told reporters the central bank sees gross domestic product rising 4 percent in 2014, up from an April projection of 3.8 percent. The BOK raised its 2013 GDP forecast to a gain of 2.8 percent, compared with 2.6 percent in April.

Dollar Cost

Three-year sovereign note yields rose to 3.12 percent on June 24, the highest since last July, and were at 2.85 percent on July 18, Bloomberg data show. The extra yield investors demand to own Korean company notes over similar-maturity government debt has narrowed to 48 basis points from 59 basis points a year ago.

South Korea’s won has weakened 5.5 percent against the greenback this year and was at 1,124 per dollar at 9:14 a.m. in Seoul today.

Moorim Paper Co., a Gyeongnam, South Korea-based paper maker, is expected to price 30 billion won of notes this week, data on preliminary sales compiled by Bloomberg show. Woori Finance Holdings Co. is also planning a 50 billion won-bond sale later this month, the data show.

Korea international bond sales rose to $1.03 billion this month-to-date from $130 million the same period of June, according to data compiled by Bloomberg.

The one-year rate to swap won loans for dollars, a gauge of the availability of dollar funding, was at 1.63 percent today, after touching 1.38 percent on June 24, the lowest since October 2011.

Top Five Underwriter Rankings Year to Date
Company                            Market Share   Amount in Won
Woori Investment & Securities Co.  18.4%          3.13 trillion
KB Investment & Securities Co.     18.2%          3.10 trillion
Korea Investment & Securities Co.  16.7%          2.85 trillion
Daewoo Securities Co.               7.9%          1.35 trillion
Samsung Securities Co.              4.5%           763 billion