While the corporate bond market is being reorganized around repayment, the procurement conditions of..

While the corporate bond market is being reorganized around repayment, the procurement conditions of low-credit companies are rapidly deteriorating. As demand is focused on high-quality products, the market for low-quality corporate bonds is virtually frozen. Amid the heightened market threshold, it is not easy for companies with small scale or low credit ratings to raise mid- to long-term funds through corporate bonds.

According to the financial investment (IB) industry on the 17th, only 10 corporate bonds were issued by companies with a credit rating of BBB or lower in the second half of this year. Compared to 25 cases issued in the same period last year, the number of cases has decreased significantly. The biggest reason is that procurement costs have soared due to rising market interest rates. In the second half of this year, the interest rate on three-year treasury bonds jumped by 0.6 percentage points, and the interest rate on three-year BBB-grade corporate bonds also rose by about 0.7 percentage points, moving around 9.4%.

As access to the corporate bond market has been blocked, companies seem to be moving to the short-term funds market. According to the Korea Securities Depository, the short-term bond balance of general companies, excluding financial companies and insurance companies, more than doubled from 5.651 trillion won at the end of 2021 to 12.1848 trillion won at the end of 2023 and increased to 13.78 trillion won as of the 15th. The balance of corporate bills (CPs) also surged from 22.7647 trillion won at the end of 2021 to 41.6695 trillion won now.

However, it is pointed out that the greater the dependence on short-term products, the more difficult it is to procure them depending on market conditions every time they reach maturity, which could lead to greater liquidity risks for mid- and low-credit companies. Even within the short-term market, there was a clear difference in accessibility by grade. The proportion of A1 grades among CP and short-term bond balances increased from 86.7% at the end of last year to 89.2% as of the 15th, while the proportion of A2 to A3 grades decreased from 13.2% to 10.7%. This means that not only corporate bonds but also mid- and low-credit supplies are narrowing in the short-term market.

The deterioration of financing conditions is also being felt at the site of small and medium-sized enterprises. In a survey of 1,000 SMEs conducted by the Korea Federation of Small and Medium Businesses, 56.8% of respondents said the business environment was “difficult” this year. 27.1% of companies cited “difficulty in financing” as a factor in management difficulties. 78.3% of respondents predicted that the business environment next year will be similar to or worse than this year.

“As small and medium-sized enterprises strive to improve their management environment, such as reducing costs and improving productivity, the government should also strengthen policy support for lack of funds and manpower to support small and medium-sized enterprises to overcome the crisis,” said Choo Moon-gap, head of the economic policy division of the Korea Federation of SMEs.

Authorities are pushing to expand the supply of venture capital as a way to alleviate the financial crunch. The financial authorities additionally designated Kiwoom Securities, Shinhan Investment & Securities, and Hana Securities as issuing paper operators, and selected Mirae Asset Securities and Korea Investment & Securities as operators by introducing comprehensive investment account (IMA) products for the first time.

However, there are many views in the market that it is difficult to feel the effect of the policy immediately. An official from the IB industry said, “Both issued bills and IMA have no choice but to selectively include venture capital, even if a certain portion is allocated, there may be limitations in changing the medium and low credit financing conditions of the entire market in a short period of time.”