It’s been a tough old year for Korea’s bond issuers. Until talk of tapering quantitative easing, uninspiring growth in China and hard-to-plug current account deficits in Indonesia and India, demand for their names was lacklustre at best. But now investors want names that hail from countries with relatively sturdy fundamentals.
But while familiar names such as Korea Development Bank and Export-Import Bank of Korea will come to the market, Korea’s private-owned corporates will remain absent.
Despite the advantages, the outlook for South Korea’s high yield market looks bleak at best and will probably stay that way for months — or even years — to come. Unlike Chinese and Indonesian names, South Korean companies have a particular dislike of being labelled a high yield credit, say bankers, especially since most of those companies are rated A or even AA locally.
It’s a pride issue, and bankers admit they have little idea how to change the negative perception of receiving lower ratings from the big three global ratings agencies.
Highly-rated Korean companies also fear that local investors could lose appetite for investing in their bonds if that company is considered a high yield name when measured according to global standards. And with the markets favouring credibility and transparency, suggestions from several South Korean high yield companies about doing unrated deals have been rejected by bookrunners.
It’s no wonder, then, that among countries in non-Japan Asia, South Korea ranks last for high yield bonds after Singapore and Sri Lanka, according to Dealogic. Only 24 deals worth $7.8bn have originated from the country since the first high yield deal in 1995. That compares with China, where 17 property developers issued deals worth $6bn just in January 2013 alone.
Yet it is precisely now that South Korean bankers should encourage the country’s non-investment grade names to use the momentum around Korea to promote its nascent high yield bond market, especially as tightening liquidity onshore is making it more challenging for companies in shipping, construction and industrials to access financial backing from local investors.
Even though Asia’s high yield bond market is all but shut, South Korean credits that could offer diversification away from the endless line of Chinese property developers and Indonesia commodity producers would be a welcomed addition Asia’s non-investment grade mix. Korea has less macro noise than China and Indonesia, which could also pique the interest of high yield investors who have been largely inactive for months.
One way to help Korean companies overcome the stigma of high yield ratings is for bankers to educate private banks and fund managers on Korean high yield credits. Korean companies may become more relaxed about issuing bonds with lower ratings if they are able to identify specific investor demand especially from real money accounts. It could also force them to internationalise their business practices according to global standards and boost transparency.
It is also in the interest of the government and finance ministry to help build Korea’s high yield market as that will put less pressure on policy banks to prop up companies in need of funding especially during stressed times.
The reluctance to meet investors with lower ratings is understandable. But the benefits of becoming versed in the international capital markets and securing offshore financing should help Korean companies reap stronger merits in the long run.