Korean companies face mounting funding burdens as high interest rates and a weak won persist. Following strong U.S. employment data, global rate pressures have intensified, and Korea's bond market appears to be pricing this in excessively. With the won-dollar exchange rate also topping the 1,500 won level, expectations are growing for a possible interest rate hike by the Bank of Korea.
According to the Korea Financial Investment Association on Wednesday, the yield on three-year corporate bonds rated AA- stood at 4.499%. After surpassing the 4% level in March for the first time in about two years, the yield has maintained its upward trend, climbing as high as 4.546% on Monday. This is the highest level since the second half of 2023, when yields ran high on concerns over prolonged U.S. monetary tightening. As a result, the market is forecasting that the Bank of Korea will raise its base rate at next month's Monetary Policy Board meeting.
This high-interest-rate phenomenon is attributed to the ripple effects of rising rates in global markets. The yield on the 10-year U.S. Treasury note recently climbed back to around 4.5%. This came as U.S. employment data for May exceeded market expectations, fueling concerns that the Federal Reserve could shift toward a rate-hike stance within the year. "As the Fed's rate cuts are delayed, the burden of prolonged high interest rates is likely to materialize," said Yoon Yeo-sam, a researcher at Meritz Securities. "With U.S. employment data also showing favorable results, pressure on the Fed to raise rates has increased."
The exchange rate, which has breached its upper limit, is also adding pressure on market rates. While the won-dollar rate has fallen to around 1,520 won, it still remains above the 1,500 won level. Some analysts say that if the bond market is used as a tool to defend the currency, the upper ceiling on yields could open up to 4.0% for three-year treasury bonds and 4.5% for 10-year treasury bonds.
Rate instability has translated into pressure on the corporate bond market. As treasury bond yields surge and corporate bond yields rise alongside them, companies face an inevitable increase in issuance costs even if investor demand holds steady. Accordingly, some major corporations are reportedly considering repaying maturing corporate bonds with cash on hand rather than refinancing if the high-rate trend continues. "Among companies preparing to issue in the second half, some are considering repayment if rates stay at current levels," an investment banking (IB) industry official said. "There is a mood of considering various funding methods, including loans."
Beyond corporate bonds, other funding channels are also not readily available. Following the contraction of price return swap (PRS) contracts amid sharp stock price swings, the financial authorities' restrictions on rights offerings and the cooling of the initial public offering (IPO) market have combined to narrow companies' options. In particular, for PRS, the fact that major securities firms have signed contracts approaching 10 trillion won, increasing the scale of their exposure, is cited as a burden. "Amid recent heightened volatility in the stock market, additional PRS deals are not easy due to last year's base effect," another IB industry official said. "It is also difficult to sell down (resell) existing holdings."
Demand centered on high-grade issues remains firm. According to NH Investment & Securities, in recent demand forecasts excluding hybrid bonds, companies secured more than five times their planned offering amounts. This is the result of limited issuance volume combined with the increased appeal of higher yields, and from the corporate perspective, the burden of interest costs outweighs securing funds.
