KOR

Research Staff

Research Staff

Kim, Pil-Kyu Senior Research Fellow Capital Markets
Research Field

Profile

TEL
82-2-3771-0631
E-mail
pkkim@kcmi.re.kr

Publications

Opinion

Structural Shifts in the Credit Bond Market in Response to Market Changes / Jun. 25, 2024
The credit bond market in Korea has been recently undergoing structural changes, driven by various factors such as rising interest rates, supply-demand imbalances, and heightened credit risk. The increased volatility in interest rates has led to a sharp decline in average maturities of domestic credit bonds, prompting a surge in financing cost ratios. As evolving market conditions have increased refinancing instability, the issuance of floating rate notes (FRNs) has expanded during certain periods. In addition, credit bonds have been utilized not only for their primary purpose of capital raising but also for supplementing equity capital.These structural changes in the bond market can be attributed to the financing strategies employed by credit bond issuers as well as changing market conditions. Despite various attempts to improve financing efficiency, the outlook for market conditions remains unfavorable. Persistent inflationary pressures defy market expectations, casting uncertainty over the timing of policy rate cuts. Even if interest rates drop, a return to the low interest rate environment is unlikely. Concerns about project financing (PF) defaults have barely abated, and some industries have experienced credit rating downgrades. Furthermore, the rise in financing cost ratios stemming from higher interest rates is likely to further strain corporate financial health.To maintain the health of the credit bond market amidst these evolving conditions, it is crucial for credit bond issuers to enhance profitability, strengthen risk management, and improve financial stability. On top of that, policy support is needed to enhance stability in the credit bond market. Alongside macro-prudential policies, a robust financial support system should be established to swiftly address any market disruption event.
A Regulatory Shift in Asset-backed Securities: Impact and Outlook / Jan. 02, 2024
Korea’s asset-based securities (ABS) market is divided into the registered and non-registered ABS markets, each exhibiting some differences in the regulatory system and market structure. The registered ABS market is constrained by strict regulatory procedures and has limitations in introducing innovative securitization structures and new assets for securitization. The non-registered ABS market has attempted to adopt ABS with various structures but struggles with low market transparency.In response, the Korean government has amended the Asset-backed Securitization Act and will put the amendment into force in January 2024, aiming for enhancing transparency in the ABS market and promoting the introduction of diverse securitization structures. This amendment includes measures to expand the scope of originators, allow for the introduction of new securitization structures such as the multi-seller structure and clarify the concept of ABS, in an effort to invigorate the ABS market. On the other hand, it also adopts stricter regulations related to ABS, including enhancing disclosure of issuance details for registered and non-registered ABS and introducing the risk retention system for originators. These regulatory improvements are expected to have positive effects, such as the relaxed eligibility for originators, the securitization of a range of assets, and the introduction of new securitization structures. Additionally, the overall transparency of the ABS market is likely to improve, thereby contributing to the healthy development of the market. In the meantime, the risk retention regulation is anticipated to have a limited impact on the market, due to its relatively flexible approach. For the benefits of these improvements to be effectively realized, market participants should strive to boost the ABS market by issuing ABS based on various underlying assets and to enhance transparency for the development of the ABS market.
Changes in Corporate Debt Structure in Response to Rising Interest Rates / Jun. 13, 2023
Amid rising market interest rates and changes in the funding market environment, the financing structure of listed companies has become diversified. As the yield of corporate bond issuance has shot up due to the increase in real interest rates, listed companies are increasing their reliance on financing alternatives while curtailing corporate bond issuance. Although the financing structure of listed companies has become more flexible in response to the rise in interest rates, the financing cost for listed companies climbed in 2022 on a YoY basis. However, as rate hikes primarily affect newly raised funds, the increase in financing costs for listed companies is smaller than the rise in real interest rates. Furthermore, the difference in financing structure and credit ratings has made the increase in financing costs vary by market and company size. Meanwhile, corporate financial soundness has been undermined by a higher financing cost and lower profitability resulting from the economic slowdown. If interest rates keep rising further, listed companies may have to cope with higher interest expenses and worsening financial conditions, due to an additional interest burden from rollover. Fortunately, interest rates have recently stabilized, easing concerns about a spike in corporate credit risk posed by rising interest rates. Considering lingering inflationary pressures and risk factors lurking in the money market, however, it seems hard to expect corporate financing conditions to show signs of drastic improvement. Accordingly, efforts should be exerted to proactively respond to the potential risks in the funding market, keep corporate financing costs down, and enhance corporate fundamentals.
How the Corporate Bond Market Changes in Rate Hike Cycles / May. 17, 2022
Recently, a sharp increase in the market interest rate has dwarfed the corporate bond market. The supply and demand imbalance of credit bonds has widened credit spreads, driving up financing costs through corporate bond issuance. In particular, Korea’s corporate bond market has seen the yield on issuance climbing and maturities getting shorter amid rising market interest rates since the second half of 2021. The impact of the upward trend in market interest rates varies by bond type. It tends to have a relatively limited impact on public placement bonds, while private placement bonds are faced with a sizable increase in financing costs and shorter maturities due to rate hikes. Looking forward, the market interest rate is likely to climb further, underpinned by changes in internal and external financial conditions. As the market for public placement bonds acts as a source of financing for companies with relatively strong credit quality, its exposure to rising interest rates would be limited. In addition, an increase in interest rates below a certain level is less likely to affect directly their financial performance. On the other hand, private placement bonds are used for financing by companies with lower ratings and thus, would be likely swayed by rate hikes. In this regard, what is needed is to step up management efforts for the sectors with poor credit quality in response to changing interest rates. Also necessary is to examine how changing conditions in Korea and abroad such as rising interest rates would influence the entire economy including the production and export sectors and to strengthen economic fundamentals.