Fundraising through mezzanine securities — convertible bonds (CBs), bonds with warrants (BWs) and exchangeable bonds (EBs) — has approached 9 trillion won ($6.5 billion) in South Korea this year. With corporate bond yields staying high and a strong stock market lifting the value of conversion rights, companies are turning to mezzanine instruments as a way to raise money at relatively low cost, analysts said. Once dominated by small and mid-sized growth companies, the market is now drawing in blue-chip conglomerates, widening its role as an alternative funding channel.
Cumulative mezzanine issuance this year reached 8.87 trillion won, according to BondWeb data released on the 17th. That is 82.7% of last year's annual issuance of 10.73 trillion won and already exceeds the full-year 2024 figure of 8.51 trillion won.
CBs led this year's expansion. Cumulative CB issuance totaled 7.47 trillion won, or about 84% of the total, up 31% from 5.70 trillion won last year. On an annual basis, it is the second-largest volume since 2017, behind only 2021's 9.79 trillion won.
The pickup in mezzanine fundraising has been driven by rising corporate bond costs and strong share prices. Yields on three-year AA- corporate bonds, which had hovered in the 2% to 3% range last year, have jumped to the mid-to-high 4% range this year, increasing interest burdens. At the same time, a record-strong rally has pushed up stock prices and, with them, the value of conversion rights. Because CBs can attract investors even with low coupon rates, their relative appeal as a funding tool has grown.
EBs, which surged last year, have fallen sharply. EB issuance dropped to 1.07 trillion won this year from 4.80 trillion won last year. Preemptive fundraising demand had piled up ahead of last year's revision to the Commercial Act, but that demand has since eased. BW issuance came to just 333.3 billion won this year, leaving CBs to effectively drive the market's growth.
The mix of issuers is also changing. In the past, CBs were used mainly by small and mid-sized growth companies with limited access to the public corporate bond market. This year, however, blue-chip firms such as Korea Aerospace Industries, Hyundai Engineering & Construction (000720.KS) and Samsung SDS have raised money on a large scale. Korea Aerospace Industries and Hyundai Engineering & Construction each issued 500 billion won in CBs at a 0% coupon rate, while Samsung SDS raised 1.22 trillion won. Analysts said the appeal lies in the ability to lower interest costs when supported by growth expectations.
Industry watchers expect the trend to continue for some time. Companies in sectors where strong share prices, high corporate bond costs, and funding needs for capital investment and mergers and acquisitions all converge have greater incentive to use CBs.
"Issuance could expand, centered on industries with recent strong share performance and large investment demand, such as semiconductors, defense, shipbuilding and power equipment," said Lee Se-hyun, a researcher at NH Investment & Securities. "But if share prices fall below the conversion price, redemption demands could increase liquidity pressure, so companies should weigh both the purpose of the funding and the likelihood of conversion."
