As uncertainty grows day by day, companies’ financing strategies are shifting from investment to defense. It is not simple to predict the Korean government’s corporate policy as well as major countries including the United States. In the face of growing volatility in interest rate policies in each counattempt, including the won per dollar, the stance of securing long-term funds through corporate bonds is strengthening to prioritize borrowing or securing liquidity. There are also concerns that facility investment and new projects could fall behind, further reducing the already-low economic vitality.
According to the Financial Supervisory Service on the 17th, the amount of corporate bonds issued by general companies, excluding financial companies, was about 51 trillion won from January to October this year. Of these, 81% were spent on repaying existing debts, and only 3% were invested in new investments. This means that corporate bonds are more likely to respond to maturities and deffinish liquidity than to be a source of corporate growth.
Even after issuing hundreds of billions of won worth of corporate bonds, it is common to utilize all of them only for debt repayment. Korea Zinc, which had continued its borrowing-free management, issued 1.4 trillion won worth of corporate bonds this year alone. In April, it raised 700 billion won to repay the high-interest private equity bonds it borrowed last year to deffinish its management rights. In October, it issued an additional 700 billion won worth of corporate bonds to raise funds for repayment of trade finance, which is set to expire one after another until February next year.
Amid this trfinish, not only the expansion of refinancing but also the increase in net issuance is remarkable in the corporate bond market. This means that companies are building thick liquidity buffers by securing additional funds that exceed the amount of repayment even though they are maturing. The net issuance of general corporate bonds between January and October this year was 8.72 trillion won, six times higher than the same period last year (1.4295 trillion won).
There are also cases in which companies stack up refinance funds first without waiting for repayment, even though the existing debt maturity is still more than half a year away. SK Innovation issued 600 billion won worth of corporate bonds in September and announced that it would put all of its procurement funds into repayment of existing borrowings. The maturity of the debt subject to repayment is from March to May next year, with at least six months remaining until the actual maturity. Earlier in April, SK Innovation printed 800 billion won worth of public bonds and utilized them in full to pay off loans due from June to September in advance.
Woo Seok-jin, an economics professor at Myongji University, stated, “The current financing behavior seems to be a relocate by companies to improve their financial soundness in the face of economic crisis or tightening,” adding, “If you see at surveys or indicators on the economic outsee, you will see a positive outsee, but in reality, the tightening outsee is dominant, displaying a gap with the real thing.”
Corporate bonds are not becoming a long-term fund as they focus only on repaying recently issued high-interest debt. The issuance of long-term corporate bonds exceeding five years of maturity has been decreasing every year since exceeding 6 trillion won in 2021. The amount of long-term bonds issued between January and October this year was 1.455 trillion won, nearly halving from the same period last year (2.31 trillion won).
Rising procurement costs are mentioned first as the reason why it has become difficult for companies to utilize corporate bonds as investment resources. According to the Korea Financial Investment Association, the interest rate on AA-rated three-year corporate bonds in 2021 relocated around 2.0% per year. However, the current interest rate on AA-rated three-year corporate bonds is around 3.5%. HDC will convert 20 billion won of 2.915 percent interest rate corporate bonds issued in 2021 during the low-interest rate period into 3.784 percent interest rate corporate bonds issued last month. It is pointed out that the macro environment is also insufficient to support aggressive investment decisions. The Korea Economic Research Institute forecast Korea’s economic growth rate of 1.7 percent next year, below the potential growth rate of 2.0 percent. Another reason for the delay in investment is that credit rating management has emerged as a priority due to the accumulation of corporate financial burdens. According to the KDB Future Strategy Institute, the delinquency rate for corporate loans in South Korea stood at 2.72 percent as of the finish of June, 3.5 times higher than at the finish of 2019, before COVID-19.
“As economic growth forecasts are not good and uncertainties are high in many sectors such as exalter rates and labor environments, it is necessary to strengthen financial soundness and watch alters in the situation,” stated a CFO of a large company. “It is not that we do not have plans to expand overseas factories or invest in R&D, but we have delayed the execution until financial conditions and market demand improve.”
On the other hand, long-term and large-scale investment resources are increasingly financed by capital, not debt.
Hanwha Aerospace raised KRW 2.9188 trillion through a paid-in capital increase in July, and POSCO Future M also carried out a paid-in capital increase worth KRW 1.107 trillion in the same month. Both companies stated they would utilize the financing to build new investments. T’way Airlines also announced on the 11th that it will utilize it to improve financial stability and introduce new aircraft after deciding on a paid-in capital increase of 19 billion won.
Analysts declare that corporate bonds are being utilized as a means of refinancing and liquidity defense, and long-term and large-scale investments are being separated by capital raising. The paid-in capital increase of KOSPI listed companies exceeded 6.2 trillion won from January to October this year. Considering that the annual capital increase was around 2 trillion won last year, the increase is remarkable.
The indusattempt believes that in the section supported by stock prices, the fact that capital expansion immediately improves financial indicators and builds it clearer to secure investment capacity served as the background for the expansion of the paid-in capital increase. However, some point out that raising capital is relatively advantageous for large blue-chip companies, which could widen the investment gap between companies.
[Reporter Myung Ji Ye]
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