Big Korean Corporate Failures Cloud Outlook After Record Issuance Drop; “Investors don’t trust even the A-rated companies after what happened at Tongyang”

Failures Cloud Outlook After Record Issuance Drop: Korea Markets

Offerings of won-denominated company bonds in South Korea plunged the most on record as corporate failures from Tongyang Group to STX Corp. dimmed investor appetite for lower-rated debt. Total sales slid 42 percent in 2013, the biggest drop in Bloomberg-compiled data going back to 1999. Companies rated A or below led the slump, issuing 7.01 trillion won ($6.6 billion) compared with 12.87 trillion won in 2012.Investors are demanding the biggest yield premiums over government securities in almost two years after the collapse of shipbuilder STX and units of Chaebol Tongyang Group rattled markets. Samsung Securities Co. said in a Dec. 9 report that issuance may drop further as investors avoid companies rated less than AA-. That may make it harder for companies to refinance some of the 129 trillion won that comes due next year.

“Big corporate failures led individual and institutional investors to avoid companies rated A and below, which squeezed their bond issuance,” said Chun Byoung Jo, executive vice president of KB Investment & Securities Co., 2013’s top underwriter. “As interest rates are expected to rise now that the Fed taper has started, those companies may have more difficulty in raising funds through bond issuance, while demand for companies with solid credit is expected to remain steady. ’

The spread between three-year corporate notes rated A and similar-maturity government yields jumped to 101 basis points as of Dec. 24, the widest since Jan. 27, 2012, according to data compiled by Bloomberg. The country’s 10-year government note yielded 3.60 percent on Dec. 24, down from a high of 3.77 percent on Dec. 5 up 48 basis points this year.

Plunging Sales

Sales of won-denominated notes plunged to 31.913 trillion won this year, the least since 2008, from 54.775 trillion in 2012. Faced with waning investor appetite for bonds, companies from Hyundai Group to Doosan Engineering & Construction Co. and Korean Air Lines Co. are selling assets or considering borrowing offshore to refinance. The won, which closed at 1,059.30 on Dec. 24, is forecast to rise to 1,040 by the end of 2014, a Bloomberg survey of analysts shows.

‘‘We are considering selling foreign currency-denominated bonds because the domestic corporate-debt market isn’t favorable for low-rated companies,” said Kim Ju Yeol, a spokesman for Doosan Engineering, rated BBB+ by domestic agencies. “We can diversify our funding sources.”

The company sold 100 billion won of two-year notes at 7.8 percent on Sept. 16.

The yield on investment-grade bonds denominated in U.S. dollars or euros has fallen 48 basis points since the year’s high of 2.83 percent on July 5, Bank of America Merrill Lynch indexes show. Sales of international bonds by South Korean firms dropped 9 percent to $33.2 billion this year.

KAL Tactics

Korean Air Lines, formerly the biggest issuer among companies with rating below AA-, has 1.07 trillion won of domestic bonds maturing next year, data compiled by Bloomberg show. The carrier decided to sell 30 million shares of refiner S-Oil Corp. last week to raise 2.2 trillion won. The company didn’t issue unsecured notes at all in the domestic market this year. Instead, it sold the equivalent of 900 billion won of securities backed by ticket receivables.

Hyundai Group, with businesses from shipping to stock broking, will sell Hyundai Securities Co., two other financial units and a hotel to raise as much as 3.3 trillion won, the company said Dec. 22. Hyundai Merchant Marine Co. refinanced 280 billion won of maturing debt in Oct. through the help from a state-backed refinancing program.

Further Struggles

“Corporate bond sales will decrease further in 2014 as cyclical industries including construction, shipbuilding, shipping and steel will continue to struggle,” said KB Investment’s Chun. “Companies may get funding through banks if the interest-rate difference between corporate bonds and banks narrows, and this may also squeeze of the corporate note issuance.”

South Korea’s bank loans to companies rose every month since Dec. 2012, according to data from Bank of Korea. The amount of loans outstanding climbed 8.1 percent to 636.53 trillion won, the data show.

A court in Seoul Oct. 17 ordered the Tongyang affiliates into receivership. The five group companies owed about 2 trillion won in commercial paper and bonds, mainly to retail investors, according to Standard & Poor’s.

Investor Confidence

“Investors don’t trust even the A-rated companies after what happened at Tongyang,” said Lee Do Yoon, Seoul-based head of fixed-income at Samsung Asset Management Co., the country’s biggest bond-fund manager with 89 trillion won in assets. “The spread between high- and low-rated companies should close a bit early next year as returns in A-rated company notes are expected to improve.”

The Bank of Korea said on Oct. 9 that the liquidity crisis at Tongyang had made investors more nervous and risk averse. Tongyang companies accounted for more than a third of this year’s lower-rated issuance.

STX Corp. and its subsidiaries sought voluntary debt rescheduling in May as collapsing demand for new ships and slumping dry-bulk rates led to losses at its two main units. STX Pan-Ocean Co., a shipping unit that filed for receivership in June, won approval in November for a turnaround plan that involved capital reductions and a new share sale.

“It will take time to recover investment sentiment toward low-rated firms,” said Shin Jae Hoon, head of fixed income management team at Mirae Asset Global Investments Co. with 63 trillion won in assets. “We are very cautious about investing in companies with A ratings as the polarization between companies with solid ratings and those with poor credit is likely to deepen next year.”

To contact the reporters on this story: Kyungji Cho in Seoul at kcho54@bloomberg.net; Yewon Kang in Seoul at ykang51@bloomberg.net