Corporate Bond Issuance Surges Amidst economic Uncertainty
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In the face of persistent economic uncertainties, South korean companies are increasingly turning to corporate bonds as a vital source of funding. this trend is particularly noticeable this month,with net corporate bond issuance (issuance amount minus repayments) reaching approximately ₩1.6 trillion. The total issuance volume for April has already exceeded ₩1 trillion, a level not seen as the height of the COVID-19 pandemic in 2021, when businesses grappled with heightened management risks and historically low interest rates.
Short-Term Relief,Long-Term concerns?
While corporate bond issuance provides immediate financial relief,concerns are mounting about the potential long-term implications. Some analysts suggest that certain companies are “over-issuing” bonds at interest rates exceeding market valuations, potentially leading to increased financial burdens in the future. This practice, while offering immediate liquidity, could strain balance sheets in the long run.
Over-issuing bonds at high interest rates may provide short-term relief but could create significant financial challenges down the line.
A Deep Dive into Recent Issuance Trends
Data from the financial investment sector reveals a significant surge in corporate bond net issuance during the first half of april, reaching levels unseen since April 2021. Specifically, net issuance stood at ₩1.295 trillion in 2022 and ₩728.5 billion in 2023. Notably, 2024 saw repayment amounts exceeding bond issuances. However, with scheduled maturities lower than the issuance volume at the end of this month, net issuance is projected to surpass ₩2 trillion for April. Furthermore, the total value of corporate bonds issued in the first quarter of this year rose from ₩14.6 trillion last year to ₩16.2165 trillion this year, underscoring the growing reliance on bond markets.
Debt Management Strategies: Refinancing Short-Term Obligations
A primary driver behind the increased corporate bond issuance is the strategic repayment of short-term debt. For exmaple, CJ CheilJedang recently announced its intention to allocate the entire ₩600 billion raised through corporate bond financing to repay existing debt, primarily short-term commercial paper (CP) with maturities ranging from one to three months.This move reflects a broader trend among companies seeking to manage their debt profiles by replacing short-term liabilities with longer-term bond financing.
Similarly,SK Innovation is planning a corporate bond issuance exceeding ₩400 billion at the end of this month,following a demand forecast on April 22nd. The proceeds from this issuance will be used for bond redemptions and strategic business investments, highlighting the dual purpose of corporate bonds in both debt management and capital allocation.
Some companies are opting to issue bonds even at interest rates higher than those suggested by market valuations. POSCO E&C, as a notable example, initially planned to raise between ₩100 billion and ₩200 billion through corporate bonds. However, strong demand allowed them to increase the issuance to ₩200 billion on April 16th. To attract investors, the company offered creditors a premium interest rate of 25 to 30 basis points (1 bp = 0.01 percentage point) above the private interest rate. This willingness to pay a premium underscores the urgency with which some companies are seeking to secure funding, even at a higher cost.