South Korean corporations are expected to become more visible in the international bond market this year to refinance a higher amount of debt maturing in 2013, as dominant Korean players such as the policy banks scale back issuance plans.
Corporate redemptions next year is expected to rise to 24% of the total debt maturing in Korea compared to up to 15% in 2012, according to a senior debt syndicate banker. That compares with a decreasing need from commercial and policy banks, which are estimated to have prefunded 1.5 times more than needed in the past two years.
“Banks will be enjoying their high liquidity positions,” said the banker. “Most of the debt was issued in five-year bonds in 2008, when most of the market was shut down to the financial institutions as the crisis gave them limited access to markets.”
Commercial and state-owned banks’ total issuance is estimated at US$20.4 billion in 2013, compared to about US$30 billion in 2012, according to data provided by a funding official at a Korean commercial bank. State-owned banks’ redemption is expected to fall to 57% of total redemptions from 60% this year, and commercial bank redemptions to dip from 25% to 14% in 2013.
Instead, bankers suggest that companies including POSCO, GS Caltex, SK Group, KT and Hyundai Capital may come to the bond market as they have foreign currency-denominated debt that is maturing in 2013, according to another senior debt banker.
GS Caltex has about US$400 million in bonds that will mature starting in July 2013, and the debt will have to be refinanced as internal cash flow will not be enough, according to Mic Kang, a credit analyst at Moody’s. POSCO has ¥63 billion (US$752 million) in debt maturing next year.
However, the types of companies that will be able to successfully tap the market will need to be of higher credit quality, preferably in the single A to double B range, according to another banker.
State-owned corporations like Korea Electric Power Corp are also expected to be active borrowers in the global markets as these companies will remain heavily reliant on debt funding that is needed to cover capital expenditure requirements to build new facilities.
“We expect KEPCO’s reliance on debt to remain high over the next 2-3 years because its returns on a consolidated basis will be insufficient to cover its increasing capex as well as high fuel costs,” according to a December 13 Moody’s report. “The company has increased its capex budget to around KRW57 trillion for the next three years, from around KRW35 trillion for 2009-2012.”
Kogas and Korea National Oil Corporation are also publically owned companies that have heavy capex needs in the coming years and reliable on debt funding, according to Moody's credit analyst Mic Kang.
Banks holding off
Banks such as the Export-Import Bank of Korea (Kexim) said it does not have plans to tap the bond market in the first quarter, while Korea Development Bank has cut their funding targets to US$6 billion from US$6.4 billion in 2012, according to funding officials at the banks. Busan Bank will only tap the bond market once in the second half of 2013 for about US$300 million in either dollars or yen, said an official at the bank’s treasury department.
These banks have also prefunded after the Financial Supervisory Service has asked banks in 2011 to lock in overseas funding needed to repay debt in advance to prevent liquidity constraints during a future financial crisis.
The smaller amount of new issues from banks will tighten spreads by at least five basis points from current levels, according to a treasurer at a commercial bank.
“Even if we get extra funds, there are not many avenues for us to invest extra cash in. Right now, KTBs [Korea Treasury Bond] yields are so low. So in total, there is little incentive for us to keep going at this rate,” said a funding official at a commercial bank.
Funding officials at commercial banks say currencies such as yen, swiss franc, Thai baht and dim sum are all possible funding methods, but several agreed that the dollar looks to be the most favourable currency to issue bonds in for the near term, as funding in the dollar market has become cheaper than in yen by at least 15 basis points at current levels.
“We believe that the dollar market is the most competitive currency to issue bonds, as well as for the possibility of us achieving the interest rates and sizes that we want,” according to a funding official at a state-owned bank that has been frequently tapping the bond market.
South Korean issuers sold US$36 billion in foreign currency-denominated bonds so far this year, compared to US$33 billion in 2011, according to Dealogic, of which US$21 billion was issued in the dollar. Kexim issued the most this year worth US$7.8 billion.
Hyundai Motor and SK Holdings were the only companies among the top 10 Korean issuers in foreign debt, according to Dealogic.