Corporate bond issuance by South Korea's large companies has fallen to a four-year low, as issuers pull back from a market where borrowing costs have climbed to their highest in nearly three years.
The multi-year run of steady issuance broke largely because corporate bond yields, which hovered around 2% to 3% last year, have surged to the mid-to-high 4% range this year, prompting companies to change how they raise funds. High oil prices from geopolitical risk in the Middle East, combined with a semiconductor boom, have added inflationary pressure that is pushing up both government bond yields and market rates. The possibility of a further rate increase by the Bank of Korea, along with a widening U.S. fiscal deficit and fiscal and monetary policy uncertainty in Japan and Europe, has also rattled long-term global sovereign yields, adding to unease.
The yield on three-year AA- corporate bonds rose to 4.651% on the 24th of last month, a new high for the year, according to the Korea Financial Investment Association. It was the first time the yield reached the 4.6% level in about two years and eight months, since November 2023. The yield has jumped more than 100 basis points this year alone and is holding in the mid-4% range.
The spike in yields has choked off issuance. Sales by large companies, considered the biggest buyers and issuers in the public corporate bond market, have plunged, weighing on the broader market. Large companies issued 29.2 trillion won ($21 billion) in public corporate bonds through Tuesday this year, down about 32% from 42.98 trillion won in the same period last year. The figure falls short of both 2024, at 37.77 trillion won, and 2023, at 34.67 trillion won, marking the lowest level in four years.
A number of large companies are holding back on issuance. Samsung Biologics (207940.KS) must repay about 300 billion won in bonds this year, but the company is not currently considering refinancing given high market rates, according to sources. Shinsegae Group, which bought a stake in SSG.com from financial investors in June, was offered corporate bond and hybrid securities issuance by brokerages to fund the purchase but ultimately dropped the option. An investment banking source said almost no large companies rated AA0 or higher are preparing to issue. "Brokerages are pitching, but companies are hesitant to commit because they are worried about a market that is still depressed," the source said.
The view that the contraction will be prolonged is now dominant, compounded by supply pressure from expanded government bond issuance. The continued flow of money into the stock market is also cited as one factor slowing the corporate bond market's recovery. Adding to the strain, concern is growing that rising fiscal spending on the government's mega-projects will expand the supply of treasury bonds, pushing up long-term rates and creating supply pressure across the bond market.
With conditions as they are, some in the industry say the corporate bond market has frozen to a degree comparable to the 2022 Legoland crisis. Another investment banking source said this year's slump feels more severe than during the Legoland crisis. "Companies have the financial capacity to hold out, backed by rising share prices and strong semiconductor exports, and the mood is that they are shifting to bank loans instead of issuing corporate bonds," the source said.
Companies are increasingly pushing their bond sales to early next year. The plan is to time issuance for January and February, when institutional investors begin deploying funds, to secure deeper liquidity than is available now. LX Group, which issued bonds actively through last year to fund business portfolio expansion, is leaning toward delaying issuance this year and resuming in early next year.
Some analysts warn, however, that continued delays across companies could cause confusion early next year. The more companies that seek to capture the start-of-year effect, the more institutional money is dispersed, raising the chance they fail to secure the demand they expect. Another industry source said the start-of-year effect was clearly diluted early this year as rate increases and supply pressure overlapped. "Since unexpected events like the Middle East war can occur, putting off issuance indefinitely cannot be seen as a solution," the source said.
Markets are now watching closely for this month's Monetary Policy Board meeting and the release of the 2027 budget. If they ease uncertainty around monetary and fiscal policy, the bond market could join a recovery alongside a clearing of rate uncertainty. Park Moon-hyun, a researcher at KB Securities, said trading volume could decline and market rates could fluctuate within a range as a wait-and-see stance strengthens toward the end of the month ahead of the board meeting and the budget announcement. "If the major events are absorbed smoothly and uncertainty eases, market warmth could spread gradually across different maturities and credit ratings," Park said.
