Demand for corporate bonds in South Korea is splitting sharply along credit lines. Higher-rated issuers can lean on the deep cash reserves of large companies such as SK hynix (000660.KS) and on the Bond Market Stabilization Fund as a buyer of last resort, while investors willing to buy lower-grade paper have all but disappeared.
The shift follows a steep drop in buying from public-offering high-yield funds, which had been active buyers of lower-grade bonds, compounded by defaults at JR Global REIT and JoongAng Group affiliates that have driven retail investors out in large numbers.
Lower-grade bonds rated A+ or below sold in the public and private markets this year totaled 5.966 trillion won ($4.3 billion), according to the Korea Securities Depository on the 12th. That is nearly half the 10.449 trillion won issued in the same period a year earlier. Bonds rated AA- to AA+ also fell about 37%, to 15.14 trillion won from 24.07 trillion won, but the decline in lower-grade issuance was far steeper.
The sharp pullback in lower-grade issuance is attributed to a rapidly shrinking pool of investors. High-yield funds, once a core buyer, qualify for priority allocation of IPO shares if they invest more than 60% of net assets in domestic bonds and allocate more than 45% of that to bonds rated BBB+ or below. Last year, with the market buoyant, funds actively bought lower-grade bonds to secure even a single additional share.
But as the IPO market cooled, buying of bonds by high-yield funds is believed to have fallen in step. Short-term trading gains grow only when a stock jumps on its listing day, and with a string of recent debuts trading below their offering prices, the incentive to chase IPOs has weakened.
On top of that, the defaults at JR Global REIT and JoongAng Group affiliates have driven out not only high-yield funds but also retail investors in large numbers. Hanjin (BBB+), which held a demand forecast for a public bond on the 15th of last month, drew orders of 44 billion won, slightly above its 40 billion won target, but its 20 billion won one-year tranche went 1 billion won unsold. An official in the investment banking industry said that even though Hanjin has the strongest earnings and financial stability among BBB-rated bonds, only a quarter of its usual demand took part in the bidding. "Because JR REIT and JTBC had been regular public-bond issuers, retail investors are being especially cautious about investing in lower-grade bonds," the official said.
Even within lower-grade bonds, sorting by sector and group is expected to persist. SK Ecoplant (A-), which held a demand forecast for a public bond on the 22nd of last month, secured buying demand of 987 billion won, more than nine times its 100 billion won target, by playing up its business ties with SK hynix. Since August, lower-grade issuers including E-Land World (BBB0), Samyang Packaging (A-) and Lotte Engineering & Construction (A-) have been preparing to issue public bonds.
