South Korea's corporate bond market may be showing signs of recovery with a recent spate of new issues, but for the majority of companies in the country it is largely inaccessible.
Cash-starved smaller firms are being crowded out of the bond market by the bigger conglomerates, showing investors still lack confidence in Asia's fourth-largest economy and raising the risk of more bankruptcies and a prolonging of the economic downturn.
"It might look like spring has come, but rising bond issuances by conglomerates only show investors are still focused on avoiding risks," said Kil Gi-mo, credit analyst at Goodmorning Shinhan Securities. After being dormant for more than a year as the financial crisis deepened, Korea has seen a run of bond issues in the past few months by top-rated firms. Retail and institutional investors, still wary of shares but eyeing higher returns than those offered by low-rate bank products, have lapped them up.
The surge in issues, which were often oversubscribed many times, has been triggered mainly by major conglomerates opportunistically building up cash reserves while funds are still available and affordable. Smaller firms, which account for about 60 percent of South Korea's gross domestic product (GDP) and more than 85 percent of its labour force, have been mostly left out of the bond market, despite record low interest rates.
"Large companies are piling up cash and it's not like they are suffering losses from operations or need to invest heavily," said Bryan Song, head of research at Merrill Lynch Korea. "But for companies with BBB or lower ratings, raising money is a matter of life or death." South Korea's GDP growth slowed to 2.2 percent in 2008, the weakest annual rate in a decade, as the export-dependent nation was hurt by the global slowdown. But the economy grew a seasonally adjusted 0.1 percent in the 2009 first quarter, narrowly avoiding recession, helped by heavy government spending.
Non-guaranteed won bond issues by South Korea's non-financial firms totalled 18.6 trillion won ($13.9 billion) in January-March, up from 7.4 trillion won a year earlier, official data shows. Of that, about 70 percent was issued by the country's top-20 business groups, including the Samsung, SK and Hyundai Motor groups. Bonds from companies with 'BBB+' or lower credit ratings accounted for only 3 percent of the total compared with 13 percent in the same quarter a year ago.
When 'AA-' rated Kia Motors raised 400 billion won in March, the deal was 20 times oversubscribed. By contrast, offers from small companies fail mostly in the preliminary stages, with spreads remaining sky-high, traders say. The gap between yields of 'AA-' rated corporate bonds and 3-year Korean treasury yields narrowed by 242 basis points in 2009 up to April 20. Over the same period, the gap for 'BBB-' rated bonds shrank just 56 points. "No institution is buying BBB grade bonds," said Shin Dong-jun, bond analyst at Hyundai Securities. "Fears that they will go bust in the next shockwave from the economy are keeping investors away."
Smaller companies have also found it near-impossible to borrow from banks, who are desperate to protect their capital base in the global slump, and in spite of massive amounts of liquidity injected into the system by the government. To ensure that funds flow into troubled industries and shield the economy from rising bankruptcies among small firms, South Korea is seen needing to hasten corporate restructuring, currently stuck in a time-consuming review process by banks.
Local banks have assessed credit risks of more than 180 distressed companies in the construction, shipbuilding and shipping sectors. Several of the weakest firms were declared non-viable and dozens were put on debt rescheduling, but the process has been criticised for being not fast or harsh enough. "What's needed is painful but sweeping restructuring to cut off the ailing sector and make the whole system clean," said Goodmorning Shinhan's Kil.