Bloomberg News

Korean AAA Spreads Narrowest Since 2007 as New Rules Slow Sales

May 15, 2012

South Korean companies’ borrowing costs are dropping to a five-year low compared with government yields as new regulations curb bond sales.

SK Energy Co. and Korea Hydro & Nuclear Power Co. sold local debt last month at as little as 18 basis points over similar-maturity government securities. The premium demanded to hold three-year AAA rated bonds over sovereign notes fell 21 basis points this year to 31 on May 14, the lowest since August 2007, according to Koscom Corp.

Corporate issues dropped 18 percent from March to 11.8 trillion won ($10.2 billion) last month as rules took effect that require arrangers of company debt sales to gauge investor expectations more closely than before, according to Korea Securities Depository data. Korea Investment Management Co. and Dongbu Securities Co. predict spreads will narrow further as the central bank in Asia’s fourth-largest economy holds off from raising interest rates to support growth, spurring demand for assets offering better returns than government debt.

“There is still room for corporate spreads to narrow as company notes offer better yields and Korean corporates’ fundamentals are steady,” Lee Do Yoon, who oversees 5.3 trillion won ($4.6 billion) of assets from Seoul as director of Korea Investment’s fixed-income division, said in an interview on May 11. “With the new issuance rule in place, companies are postponing debt sales until they are sure of its effects.”

Lower Yields

The drop in debt supply helped companies including Industrial Bank of Korea (024110) and Korea Hydro & Nuclear Power borrow at lower rates. The state-owned lender issued one-year notes at 3.49 percent on May 11, compared with the 3.56 percent rate it agreed to pay on similar-maturity securities last month, according to data compiled by Bloomberg. Korea Hydro & Nuclear sold 20-year bonds at 4.14 percent in April, down from 4.32 percent in March.

The Bank of Korea has kept its benchmark interest rate at 3.25 percent since June 2011, after five increases in the previous 12 months raised the rate from a record-low 2 percent. Gross domestic product rose 2.8 percent from a year earlier in the first quarter, the smallest gain since 2009, and inflation slowed to a 21-month low of 2.5 percent in April, official figures show.

‘Downside Risks’

“The Korean economy is expected to maintain a moderate trend of growth for the time being, influenced by the global economic slowdown,” the BOK said May 10 after its last policy meeting. “In terms of upside and downside risks to the future growth path, the downside remains significant.”

The yield on South Korea’s five-year government notes fell 15 basis points to 3.50 percent in the past month, approaching a September level of 3.40 percent that was the lowest since January 2005, data compiled by Bloomberg show.

Demand for Korean corporate debt is being spurred by improving credit ratings. Five companies were upgraded for each downgrade this quarter at Seoul-based Nice Pricing Services, up from three in the preceding period, according to data compiled by Bloomberg. Moody’s Investors Service raised South Korea’s sovereign credit-rating outlook to positive from stable on April 2, citing “strong and improving fiscal fundamentals.”

Notes due 2021 December issued by AAA rated SK Telecom Co., South Korea’s largest mobile-phone operator, yielded 3.92 percent on May 14, down from 4.13 percent at the end of last year, Nice Pricing data show. Woori Asset Management Co., a unit of the nation’s biggest financial services group, said last month it favors debt issued by Korean state-run companies over sovereign and riskier corporate notes.

‘Lower-Rated’ Bonds

Relative yields on lower-rated corporate debt may fall more than those on AAA notes, according to Dongbu Securities. Spreads on three-year A rated bonds over sovereign debt fell 28 basis points this year to 77 basis points on May 14, the least since 2008 March, according to Koscom, which collates price data from Korea Exchange Inc., Korea Financial Investment Association and three credit-rating companies.

The yield on notes due August 2016 issued by Korean Air Lines Co., the nation’s biggest carrier, fell 39 basis points this year to 4.48 percent, according to Nice Pricing. Korean Air is rated A by the ratings company, the third-highest grade.

“The yield premium on lower-rated companies has more room to come down,” said Park Cheongho, a credit analyst at Dongbu Securities, one of South Korea’s bond primary dealers. Spreads for “A rated companies will probably fall as much as 10 basis points more on strong demand and little supply,” he said.

To contact the reporter on this story Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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