FRIDAY, March 29, 2024
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Virus spurs record Korea Inc. bond sales in hunt for yield

Virus spurs record Korea Inc. bond sales in hunt for yield

The spread of the coronavirus is sparking a boom in sales of safer South Korean corporate bonds amid expectations the central bank will cut interest rates to support a weakening economy.

Even as concerns mount that the virus could derail a hoped-for export recovery in Korea, firms have issued 41.4 trillion won ($35 billion) of securities this year through Tuesday, the most ever for the period, Bloomberg-compiled data show. Among the issuers was SK Hynix, which sold the biggest-ever won denominated notes for a Korean company that went through the bookbuilding process.

While an economic slowdown could mean more pain for Korea Inc., investors are focused on the extra yield they can earn on debt of high-rated companies that face little risk of default. Even with coronavirus cases climbing, bond funds that invest in both company and sovereign debt saw 1.1 trillion won of net inflows in the week ended Feb. 7, the most in about six months, according to data from Korea Financial Investment Association.

"With government yields plunging after the coronavirus outbreak, there's plenty of demand for bonds that provide some extra yield compared with government debt," said Kim Min-Jeong, credit analyst at Hanwha Investment & Securities in Seoul. The favorable funding environment for companies will probably continue, she said.

Korean note funds had net inflows for a fifth consecutive week in their longest streak of increases since August, according to KFIA. Underscoring how borrowing costs are falling for the nation's issuers, the average yield on AA- rated three-year corporate notes, the benchmark, has dropped 50 basis points in the past year.

Although demand for Korean bonds remains strong, there are signs that the debt quality of companies is worsening due to the economic slump. Korean companies' downgrades will probably continue to exceed upgrades in 2020 with no sectors having a "positive" outlook, according to Korea Ratings.

But credit scores don't appear to be a major concern for investors now unless there's the risk of default. LG Chem, for example, priced a big bond deal recently even though its rating outlook was changed to negative.

"With the economy and corporate earnings slowing, you have to be more selective in your purchases," said Shin Jae-Hoon, Seoul-based head of the fixed-income team at Mirae Asset Global Investments. "That said, unless there's a significant economic slump or crisis, demand for credits will remain solid due to their attractiveness" relative to sovereign yields.

 

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