Samurai Cuts Costs for KT as Yen Sinks With Yield: Korea MarketsKyoungwha Kim and Whanwoong Choi
South Korean Samurai bond sales climbed by the most in a year this quarter as the yen weakened and relative borrowing costs in Japan slumped to a 17-month low.
Steelmaker Posco led 75 billion yen ($729 million) of yen-denominated issuance, the most since the July-September period of 2012, data compiled by Bloomberg show. Six borrowers including KT Corp. and Hyundai Capital Services Inc. raised 195 billion yen in 2013, making the nation the third-biggest seller after France and the U.S. The yield discount for Japanese three-year AA rated yen corporate debt versus those in won reached 321 basis points on Dec. 2, the widest since July 2012.
South Korean companies are seeking to cut borrowing costs as the equivalent of $44 billion in debt matures next year and the Japanese currency’s weakness gives them better terms for swapping yen proceeds into dollars. Prime Minister Shinzo Abe’s stimulus policies pushed corporate yields to the lowest in a decade on Nov. 29 and the yen slumped 17 percent this year to its weakest level since 2008 against the won.
“Conditions are very favorable for Korea to sell Samurais,” said Im Kihyun, a researcher at state-run Korea Center for International Finance in Seoul. “Issuance will be bigger in 2014 as companies have a chunk of debt rollovers in the pipeline. Diversification demand for non-dollar bonds, including Samurais, is strong.”
Nomura Holdings Inc. joined Goldman Sachs Group Inc. on Dec. 11 in forecasting the Bank of Korea will increase interest rates next year for the first time since June 2011. That contrasts with the Bank of Japan’s record purchases of more than 7 trillion yen of government bonds each month since April, which pushed the average yield on corporate debt to 0.46 percent last month, the lowest since 2003.
South Korea’s economy expanded 3.3 percent from a year earlier in the third quarter, the fastest pace since 2011, and the central bank predicts growth will accelerate to 3.8 percent in 2014 from an estimated 2.8 percent this year.
The won rallied 1.2 percent this month to 10.20 versus the yen, and touched a five-year high of 10.13 on Dec. 13. Against the greenback, it climbed 0.6 percent to 1,051.54 per dollar. Finance Minister Hyun Oh Seok said Dec. 3 the authorities are watching the won’s moves against the yen.
Diverging monetary policies in the two countries leave more scope for the won to rally against the yen, Mirza Baig, the head of Asian foreign-exchange and interest-rate strategy at BNP Paribas SA in Singapore, wrote in a Dec. 6 report. He predicts the won will climb to as high as 9 per yen in 2014.
“This year’s move in the pair has reflected the yen’s correction from an overvalued level,” Baig wrote. “Its fair value is around 10. Trying to maintain parity with the yen is impossible due to the scale of the BOJ’s base-money expansion.”
Hanwha Investment Securities Co. estimates 46.5 trillion won ($44 billion) of unsecured corporate bonds will mature in 2014, the most in its data going back to 2004 and up from 43.7 trillion won this year.
Funding challenges have increased in South Korea as global investors pull money from the nation’s assets in anticipation the U.S. will soon start tapering its record stimulus. The average yield on three-year won corporate notes is 15 basis points short of a 10-month high of 3.48 percent reached in June, Korea Financial Investment Association data show.
The 10-year sovereign bond yield touched 3.75 percent on Dec. 5, the highest since May 2012, and was at 3.61 percent today in Seoul, data compiled by Bloomberg show.
Global funds sold more Korean bonds than they bought for a fourth month in November, official data show. The Federal Reserve will taper its $85 billion of monthly bond purchases as early as tomorrow, according to 34 percent of economists surveyed by Bloomberg this month, up from 17 percent in a November poll.
“With the U.S. tapering likely, borrowing costs will climb further,” said Kim Eun Gie, a credit analyst at Hanwha Investment & Securities Co. in Seoul. “We will see an increase in primary issuance next year as more companies try to sell before yields climb, and a bigger size of debt matures.”
The Export Import Bank of Korea has 63 billion yen of Samurais due in 2014, the most among local borrowers that face a combined $3.7 billion of redemptions, close to a record $3.8 billion that matured in 2012, data compiled by Bloomberg show.
Posco, South Korea’s largest steelmaker, sold 50 billion yen of Samurais on Dec. 4, including 40 billion yen of 1.35 percent five-year bonds. Hyundai Capital said in an e-mail on Dec. 13 it sold 25 billion yen of three-year debt in October at a record-low yield of 0.75 percent for the company, which has issued notes in the Japanese currency since 2005.
“We are monitoring the Samurai market and positively reviewing issuance before maturity comes around,” Kim Jin Seop, a director at Export Import Bank in Seoul, said in a Dec. 13 telephone interview.
Samurai bonds compensate investors better than local companies’ debt. The notes pay an average 0.74 percent yield compared with 0.48 percent for Japanese corporates, Bank of America indexes show.
The five-year dollar-yen basis swap rate, which measures the cost of exchanging interest payments from the dollar to yen, was minus 58 basis points in Tokyo today compared with a one-year low of minus 82 basis points in June, data compiled by Bloomberg show. An increase cuts the cost for borrowers to sell bonds in yen and switch the proceeds into dollars.
“There’s a big pool of capital in Japan thanks to Abe’s policy that favors Korean issuers,” Kim Min Cheol, a Seoul-based manager at Busan Bank, said in a Dec. 12 telephone interview. “More Korean borrowers will tap the market, while Japanese investors seek higher yields.”