Korean corporate treasurers don’t need to read the tea leaves to know that a window of opportunity has opened up for them to tap the international bond market.
That’s not to say that Korean issuers haven’t been active this year. They’ve printed a record US$33 billion in foreign currency-denominated debt year to date, but almost half of these deals were conducted by sub-sovereign and agency (SSA) issuers, such as Export-Import Bank of Korea and Korea Development Bank, as well as from commercial lenders.
That’s a lot more than countries like China and Japan, where SSA issuance is only 27% of total volume in Japan, and none in China. South Korea’s largest companies such as tech giant Samsung Electronics issued its first dollar bond in nearly a decade in April, while LG Electronics only issued its first global bond programme in June.
Part of the lack of active corporate activity is due to the fact that Korean companies depend heavily on the domestic bond market. Corporate issuance rose to a KRW5.8 trillion (US$5.1 billion) last month, the highest in three years, because of expectations that another rate will come this year after the central bank surprised the market with a 25 basis point (bp) cut in July. These bets pushed yields on Korea’s benchmark for corporate three-year debt to hit a record low 3.35% this month. With funding costs hovering at record low levels, Korean companies are stepping over each other to lock in funding rates at a discount.
Companies may feel comfortable staying within their borders as they savour these record-low yields. But while they may be relieved of the trouble of setting up roadshows and facing possibly unconvinced international investors, it is difficult to ignore the advantages of visiting the global bond markets now.
Moody’s upgraded South Korea’s credit rating to ‘Aa3’ on August 27, lifting the sovereign rating to single-‘A’ territory for the first time. This may not directly change the official ratings of Korean companies, but it will definitely reflect as a positive development for them. It will allow them to explain to institutional investors that they are incorporated in a country that Moody's recognises as able to show relative resilience to shocks arising from the global slowdown, despite Korea’s heavy reliance on China.
It’s also become cheaper for Korean companies to exchange dollars into the local currency. The three-month swap rate has fallen 20bp in the past three months, raising hopes for funding officials at Korea’s government-owned NH Bank, which is one of the first Korean issuers to tap the market since the Moody’s upgrade. They’re hoping that the string of good news will help narrow yields below its initial guidance when it prices next month.
Abundant dollar liquidity has also driven Asian corporate issuance to a record this year, and there is the possibility that the US Federal Reserve and the European Central Bank may help expand that mass of cash through stimulus programmes, which will heighten demand for corporate paper even further. With the lack of highly-rated Asian corporate paper in the market, Korea’s single-‘A’ credits will surely be able to take advantage of this.
For example, companies like ‘A3’-rated SK Telecom, which in May announced that it will step up efforts to diversify its debt funding sources, should strongly consider looking into the market now. Not only is the name brand widely recognisable, but it already issued a CHF300 million at a 1.75% coupon rate on May 16. And having previous experience in issuing foreign currency-denominated deals have helped Hyundai Capital garner massive support for its dim sum bond this week, allowing it to slash its target yield down by 25bp.
LG Electronics, which is rated ‘Baa2’ by Moody’s and ‘BBB-’ by Standard & Poor’s, has also said it is interested in diversifying its debt sources after issuing a CHF215 million deal at a 2% coupon rate, which is the lowest among similar-rated credits. This reflects the amount of interest from some of the world’s most conservative investors for Korean bonds.
It also helps that strong support for South Korean SSAs have paved the way for more corporates to tap the market. SSAs have issued a record US$10.8 billion so far this year, but credit analysts say these bonds have not absorbed all the demand from global investors for Korean credit. With the possibility of more stimulus coming through, there will be enough money to go around. In that case, institutional investors would be surely delighted to see a different set of credit profiles beyond the frequent Kexim and KDB issues.
The importance of diversifying debt funding sources cannot be more stressed at a time when Europe’s debt crisis and a global economic slowdown continues to spill out bolts of volatility that rock the international financial markets. If Korea is serious in keeping its double-‘A’ credit rating, it is in the country’s interest for its companies not to put all its eggs in one basket. Diversification is especially important for an economy like Korea, which depends on exports for half of its gross domestic product.
It will be prudent for companies to take advantage of favourable market conditions now by diversifying its funding sources away from the domestic market. Even corporates fully funded for this year should consider prefunding themselves for 2013; it's far wiser to raise money when it's easy to do so than hope that next year’s market conditions will be better still.