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Won bond sales rebound in S. Korea

Jungah Lee and Kyungji Cho

Published: Friday, Sept. 27 2013 8:13 a.m. MDT

A man looks at an electronic stock board of a securities firm in Tokyo, Monday, Sept. 9, 2013.

Koji Sasahara, Associated Press

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SEOUL — Companies in South Korea are selling won-denominated debt at the fastest pace in five months as signs of economic growth boost confidence and borrowing costs drop to a more than three-month low.

KT Corp. and Lotte Chemical Corp. led issuance and expected offerings of 4.57 trillion won ($4.3 billion) in September, a 41 percent increase on August's 3.24 trillion won and the most since 4.61 trillion won of sales in April, according to data compiled by Bloomberg. Average yields on three-year corporate notes rated AA- were 3.21 percent on Sept. 23, the lowest since June 19. That compares with 2.19 percent for similar-rated notes globally.

Won bond sales are rebounding from the worst half since 2008 as inflation remains subdued and global central banks maintain unprecedented stimulus policies. The borrowing supports President Park Geun Hye's efforts to buoy Asia's fourth-largest economy, forecast by the central bank to expand 4 percent in 2014, the fastest pace since 2010.

"South Korea's economy is recovering," said Yoo Ik Sun, a Seoul-based economist at Woori Investment & Securities Co. "That's on the back of improving exports as well as increasing capital investments by local companies because of the new government's eased regulations."

Park has sought to spur business investment via regulatory changes. The Finance Ministry said on May 1 it will allow some manufacturers short on production space to build at government sites. In July, it said it will allow green belts to be used for new factories. That should boost corporate investment by 5 trillion won by 2017, according to ministry estimates. Earlier this week, it took further steps to streamline environment policies.

Korea's central bank held its key interest rate at 2.5 percent for a fourth-straight month on Sept. 12. With inflation near the lowest since 1999, the BOK has room to keep the seven- day repurchase rate steady, even as signs China's economy is rebounding back its forecast that domestic growth will accelerate this year.

The break-even rate, a measure of inflationary expectations, has fallen 15 basis points since the last rate decision to 1.94 percent on Sept. 25, the lowest in more than three months. Yields on South Korea's government bonds due March 2023 have dropped 7.7 basis points this month to 3.466 percent on Sept. 27.

"The bond sales rush is expected to last at least until the end of the year," said Byun Jeong Hye, a credit analyst at Shinhan Investment Corp. in Seoul. "Investors were jittery over a possible rate increase at some point but our house view is that the Bank of Korea will stand pat on rates throughout this year."

Gross domestic product expanded 1.1 percent in the second quarter from the preceding three months, the most in more than two years, Bank of Korea data showed Sept. 5. Exports, which account for around half of GDP, jumped 7.7 percent in August from a year earlier, the most since January, official data show.

The won strengthened 3.1 percent in September to 1,076.66 per dollar as of 10:32 a.m. in Seoul, the best performance since October 2011, according to data compiled by Bloomberg.

Seoul-based KT, South Korea's second-biggest telecommunications provider by market value, leads issuance since Aug. 31, raising 500 billion won via bonds due 2018 and 2020, according to data compiled by Bloomberg. Lotte Chemical, which makes high-density polyethylene and polypropylene used in pipes, bottles and containers, raised 400 billion won issuing notes which mature in 2016 and 2018, the data show.

"Corporate bond sales have risen sharply since mid-August as interest-rate fluctuations ease," said Kim Eun Gie, a credit analyst at Hanwha Investment & Securities Co. "Companies delayed their financing plans from May through July because of the unfavorable market conditions and investors also shied away from corporate bond purchases over that time."

The Federal Reserve's decision last week to maintain its $85 billion-a-month of bond purchases is also spurring sales, according to Park Jong Youn, a fixed-income strategist at Woori Investment & Securities Co.

"The Fed's much-anticipated tapering of bond purchases was delayed but it's only the matter of time, the central bank will start it at some point," Park said. "So now seems to be the perfect time for companies to sell bonds in order to avoid paying higher borrowing costs."

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