Korean companies turn to bank loans as bond borrowing costs climb

South Korea’s large corporations are increasingly replacing bond issuance with bank borrowing as corporate bond yields have climbed sharply this year, prompting lenders to step up competition for low-risk blue-chip borrowers.

The yield on three-year AA-rated unsecured corporate bonds rose to 4.466 percent as of Tuesday, up nearly one percentage point from 3.476 percent at the end of last year, according to financial industry data.

The jump marks a sharp reversal from last year, when corporate borrowing costs remained relatively stable and bond yields briefly fell below 3 percent. This year, however, strong inflows into the stock market have drawn retail investors away from fixed-income assets, while several high-profile corporate rehabilitation filings have further weakened sentiment in the bond market.

As bond financing became more expensive, many large companies shifted to bank loans, where borrowing costs remain lower for highly rated borrowers. Major banks typically offer loans to companies with AA credit ratings at interest rates ranging from the high-3 percent to low-4 percent range.

Outstanding loans to large corporations at South Korea’s five largest banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — have increased for six consecutive months since January, reaching 190.4 trillion won ($123.0 billion) at the end of June. The balance rose by 4.9 trillion won in June alone and has increased by more than 20 trillion won since the end of last year.

The trend contrasts sharply with last year, when companies largely favored bond issuance over bank borrowing as financing costs remained lower in the debt capital market.

Banks have also become more aggressive in corporate lending as tighter government restrictions on household lending have shifted their focus toward business loans. Large corporate loans have become particularly attractive because delinquency rates remain below 0.1 percent while demand for funding has increased alongside investment in semiconductors and artificial intelligence.

Smaller businesses, however, have not benefited to the same extent. Outstanding loans to small and medium-sized enterprises at the five major banks increased by only about 8 trillion won during the first half of the year, far below the increase in lending to large corporations. SME loan balances also declined in June, marking the first monthly decrease in six months.

Banks remain cautious about expanding SME lending because of higher credit risks. At the end of May, the delinquency rate on SME loans stood at 0.73 percent, compared with just 0.09 percent for loans to large corporations.

Industry officials said banks have little room to expand mortgage lending under government policy while SME lending requires greater capital buffers, making financially stronger large corporations the most attractive lending segment.

By Park In-hye and Minu Kim
[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]