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More companies suffer rising funding costs amid market unrest
By Park Jae-hyuk
Fears of a possible liquidity crisis in the coming months have failed to subside despite a series of market stabilization measures by Financial Services Commission (FSC) and the Bank of Korea (BOK). The massive steps taken by the financial authorities have not relieved the anxiety among companies, banks and investors as many firms face the possibility that huge amounts of debt scheduled to mature this month will not be rolled over due to a mixture of falling credit ratings and rising funding costs amid the market unrest.
The FSC said Thursday that the government has begun to activate part of a 20 trillion won ($16 billion) fund created to stabilize the local bond market.
But concerns remain among businesses and market analysts as to whether the measure will be effective enough to prevent an "April liquidity crisis."
Some analysts are skeptical about forecasts that the "bond market stabilization fund" will improve chilled investor sentiment in the credit-crunched corporate bond market, although most of them were in favor of it. There are also those who deny the necessity for stabilizing measures, maintaining a rosy outlook on the fundamentals of Korean businesses.
Against this backdrop, the FSC said financial firms preemptively injected 3 trillion won into the stabilization fund, Wednesday, to supply liquidity to companies hit by the COVID-19 fallout through purchases of their corporate bonds.
Since the pandemic outbreak, domestic firms have faced potential liquidity crises, as nobody wanted the newly-issued bonds, even though a massive amount of those issued previously face maturity in April.
According to the Korea Financial Investment Association, the size of corporate bonds maturing this month is 6.5 trillion won, the largest amount for April since the association started collecting data in 1991.
Companies tend to prefer rolling over corporate bonds, rather than redeeming them with cash, because rolling over costs less than redemption.
The recent credit crunch in the corporate bond market, however, has led them to borrow money from banks to pay for redemptions.
According to data from Shinhan, KB Kookmin, Woori, Hana and NongHyup banks, their corporate loan balances increased by an aggregate 19.9 trillion won in March to 1,170 trillion won, the largest increase since September 2015.
In particular, the amount of business loans increased significantly because of an additional 8.9 trillion won extended to conglomerates.
"As the corporate bond market has been chilled, larger companies have also begun to seek cash," a commercial bank official said.
Another unfavorable factor is global ratings agencies putting Korean conglomerates and banks on their negative watch lists. This is because a credit-rating downgrade usually raises corporate bond yield rates, making it more expensive or difficult for businesses to raise funds through their issuance.
This could worsen investor sentiment more, leading to "grade A" companies also suffering difficulty in finding buyers for newly-issued corporate bonds.
The FSC believes that the series of measures announced after the second Emergency Economic Council meeting March 24 will stabilize the bond market.
"Although we expect uncertainties will continue in April, we will do our best to stabilize the market through judicious use of the bond and stock market stabilization funds," FSC Vice Chairman Sohn Byung-doo said at a meeting, Thursday.
"Starting with the purchase of corporate bonds today, we expect the bond market stabilization fund will serve as a safety valve that makes up for insufficient demand in the market."
Bank of Korea Governor Lee Ju-yeol also said the same day that market demand and the stabilization fund should enable companies to refund their maturing corporate bonds for the time being.
He also hinted that the central bank could lend money to non-banking financial institutions, such as brokerages, to stabilize the bond market, if the situation worsens.
Unhelpful or unnecessary?
However, eBEST Investment & Securities analyst Lee Tae-hoon said investor sentiment in the credit market will continue to be sluggish throughout this year, despite the activation of the bond market stabilization fund.
"It will be difficult for the stabilization fund to change the trend of worsening credit risks in each industry and for each issuer," he said.
"Most people, including our company, had expected the fallout of COVID-19 to be no worse than that of SARS in 2003 or MERS in 2015, but its impact is far bigger. This indicates that the stabilization effect of the fund could differ from that in 2008."
The analyst also expected banks would remain conservative when screening companies to invest in because they are already suffering from deteriorating profits due to low interest rates.
"In 2008, investments by banks accounted for 80 percent of the stabilization fund, and their proportion is also expected to remain high this time, so banks are bearing a heavy burden," he said.
However, Hana Financial Investment analyst Kim Sang-man had a differing viewpoint from Lee, as he considers the "April liquidity crisis" to be nonsense.
"Considering Korean companies' corporate bond issuance structure and their overall fundamentals, it is clear that the current situation is not that alarming," he said.
In this regard, he was unsure of the necessity of the bond market stabilization fund, although he admitted it could be an appropriate measure, only as a matter of "precaution."
