Korea Electric Power raised 590 billion won (US$432 million) in October, less than half of its target of 1.2 trillion won, according to lawmaker Chung Il-young of the Democratic Party, who received the data from the company. The company confirmed that it had submitted the data to him.
Experts point to Gangwon province’s announcement that it would not repay debt of Gangwon Jungdo Development Corp, which is owned by the province and developed the Legoland Korea Resort amusement park, as a trigger of the crisis.
Gangwon decided to make a court filing for bankruptcy for Gangwon Jungdo Development “to avoid paying back 205 billion won that the company borrowed from BNK Securities”, the province’s new governor, Kim Jin-tae, said in a news conference on Sept 28.
Later the governor, surprised by the reaction from the market, promised to pay back the debt by Dec 15, but it was too late to calm the jitters.
Investors have grown concerned over the creditworthiness of corporate borrowers, leading to a loss of liquidity in the market and raising yields sharply. The average yield for three-year corporate bonds with AA- credit ratings reached 5.69% last week, up from 4.537% two months ago, according to Korea Financial Investment Association data.
To calm the market, the government of President Yoon Suk-yeol and the Bank of Korea announced on Oct 23 that they would inject at least 50 trillion won into the bond market after finance minister Choo Kyung-ho hosted an emergency meeting along with BOK gov Rhee Chang-yong and other policymakers.
With the liquidity supply programme, the government started to buy corporate bonds and commercial papers through a 20 trillion won fund. The government also doubled the size of a state-run bond-buying programme to 16 trillion won.
Analysts said the measures might not be enough to stabilise the market, where lending conditions are the tightest since the global financial crisis.
“We believe the current policy measures will provide only limited near-term help and are unlikely to address the potential risks of a system-wide credit crunch,” said Park Jeong-woo, an economist at Nomura, in a note last month. “Amid rising credit stress, Nomura-KRFCI, our financial conditions index, has tightened to the highest levels in October since the 2008 global financial crisis.”
Investor concerns over South Korean companies spread to overseas bond markets too, after small life insurers Heungkuk Life Insurance and DB Life Insurance said they would not repay their perpetual bonds denominated in US dollars on the expected call dates, citing unfavourable market conditions.
A perpetual bond is a bond with no maturity date, but the market took the companies’ announcements as a warning sign because issuers usually redeem perpetual bonds on call dates.
Later, Heungkuk and DB changed their mind over calling the options with support from their parent companies and local lenders as the financial regulator pushed them to help.
But analysts say the government’s interventions were inappropriate, as they could put the companies in legal trouble.
“We see the actions of the regulators and the authorities as extraordinary. While the actions were taken to stabilise volatility in the domestic Korean won market and for Korean issuers in the US dollar market, the processes do not show either the regulator or the company in good light,” said Pramod Shenoi, co-head of Asia-Pacific research at CreditSights, in a note on Wednesday.
“It is our understanding that issuers are also not legally permitted to rescind the redemption notice once it has been issued and that some investors were considering legal action against Heungkuk Life,” Shenoi said.
CreditSights, a research unit of Fitch Group, said the extraordinary actions directed by the South Korean regulator had led to a rally in insurance perpetual bond prices in Asia.
Investors are watching whether the loss of trust in South Korea’s corporate bonds will spill over into stock and foreign exchange markets as well. So far, Seoul’s stock market has been resilient to the corporate bond crisis, with its benchmark KOSPI index rallying more than 14% since the end of September. The South Korean won also has gained by 7.4% against the dollar during the same period.
However, the credit default swap premium for five-year South Korean government bond, an indicator of default risk, has risen sharply over the past few months. It more than doubled to 74.98 on Nov 3 from 32.73 two months ago, reaching the highest level in five years, according to S&P Global Market Intelligence data.
Economists say the South Korean economy’s fundamentals are strong enough to fend off the corporate bond crisis.
“It does not make sense to compare the current situation to the foreign exchange crisis in the past,” said Oh Suk-tae, a senior economist at Societe Generale, referring to the Asian financial crisis in 1997-98. “Stocks rose, and the foreign exchange rate is stable. I think it’s more like the market is testing South Korea like they did the UK recently.”
Oh said that the BOK holds the key to resolving the crisis, as the central bank can slow down its cycle of interest rate rises to stop bond yields from rising further. Gov Rhee has signalled an intention to raise the benchmark interest rate further to tame inflation.
“Investors will not buy bonds now if they expect their yields will rise further. It’s all about price. The BOK may take a baby step this time,” Oh said, expecting the central bank will decide to raise its key rate by a quarter of a percentage point at its next meeting on Nov 24, rather than half a percentage point, to stabilise the bond market.