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Companies are turning to bank loans and asset sales to secure cash instead of issuing corporate bonds amid rising interest rates.

According to the local banking industry, banks' corporate loans have been increasing for nine consecutive months. The outstanding balances of corporate loans at five major banks ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― stood at 756.3 trillion won ($561 billion), as of the end of September. It is a more than a 52 trillion won hike from the end of last December.

Companies have been knocking on the doors of banks that offer relatively lower interest rates than bond issuance. However, the burden faced by companies in issuing bonds has become even more exacerbated, as banks plan to issue even more bank loans to meet the increasing demand of corporate bonds. The increase in bank bonds, often more credible with investors, will subsequently push corporate bonds aside.

In addition, local credit market liquidity is expected to be hit further, as the financial authorities have decided to eliminate the issuance limit for bank bonds starting this month. The financial authorities' move is aimed at helping banks find ample capital for upcoming high interest rate mature savings products. Yet, as a consequence, top credit-rated banks will dominate the credit market, absorbing institutional investors' demands for bonds.

The demand for relatively riskier corporate bonds usually decreases when the issuance of top-credited bank loans rises. In fact, the net volume of corporate bond issuance has significantly reduced in the second half, from the first half's 17.3 trillion won. Companies cannot but raise the yields for their bonds further to attract the necessary capital.

Against the backdrop, companies with good credit ratings, including Hyundai Department Store with an AA+ rating, and Lotte Chilsung Beverage, with an AA0 rating, are planning to raise capital through bond issuance. Other high-standing companies like EcoPro BM, LG Uplus and LS Cable & System aim to issue bonds later this year, as they attempt to preempt the credit demand before other more competitive bonds.

"The credit market is showing signs of an overall weakness, as construction and bank bonds have turned enervated, which had been strongly leading the credit market, while spreads are widening across all sectors," Lee Kyong-rok, a bond analyst at Shingyoung Securities, said. "As we enter the fourth quarter, the credit market seems to be currently experiencing an unease due to several factors, including the burden of upcoming maturities of high-interest deposits, the collection of public funds as well as the resumption of KEPCO bond issuance," the analyst added.