Card bond issuance more than doubled in a month. As the maturities come due for card bonds issued at high rates during the so-called "Legoland incident" three years ago, card companies appear to be reissuing bonds at lower rates. By doing so, card companies can keep cash flowing while reducing the interest expense they must pay to bond investors.
According to the Korea Securities Depository (KSD) on the 5th, the total card bonds issued in October by eight major card companies (KB Kookmin, Lotte, BC, Samsung, Shinhan, Woori, Hana, Hyundai) came to 3.2 trillion won, up 123.8% from the previous month's 1.43 trillion won. The amount of bonds issued by card companies in September fell about 40% from August's 2.31 trillion won.
Because card companies, unlike banks, cannot raise funds directly through deposits and installment savings, they issue bonds to secure resources needed to operate loan products such as card loans. They borrow money from investors through bonds and earn revenue from loan interest.
In 2022, in the aftermath of the so-called "Legoland" incident, rates on bonds issued by specialized credit finance companies (asset-backed corporate bonds) rose sharply. During the Legoland development process, Gangwon Province provided a payment guarantee for 205 billion won of bonds, but when it failed to repay them at maturity in Sep. 2022, the issue exploded.
When bonds guaranteed by a national institution, a local government, were treated as in default, confidence in the market for bonds issued by private corporations was badly shaken, and card bond rates also spiked. For card companies, when card bond rates rise, the interest they must pay to investors increases, raising the expense burden. Typically, the rate on a three-year "AA+" asset-backed corporate bond is in the 3% range, but in Oct. 2022, right after the Legoland incident, it exceeded 6%. Generally, these bonds have maturities of three to four years, and the bonds issued at that time reached maturity last month.
Currently, the low-rate environment has reduced the interest expense burden of card bonds. In May, the Bank of Korea cut the base rate to 2.5% from 2.75% and has kept it at that level to date. According to the Korea Financial Investment Association's Bond Information Center, as of October, the rate on a three-year "AA+" asset-backed corporate bond was 2.988% per year, lower than the start of the year (3.08%). It is also much lower than the 4% range recorded last year. In this environment, card companies appear to have issued bonds one after another at lower rates than during the Legoland incident.
However, the industry expects card bond issuance to shrink again due to the government's lending restrictions. Under the three-stage stress debt service ratio (DSR) regulation implemented since July, and in line with the financial authorities' policy, card loans are included as unsecured loans, and a stress rate of 1.5% applies immediately to new originations regardless of amount.
Accordingly, the supply of card loans has also been declining recently. According to the Credit Finance Association, the balance of card loans at the end of September at nine card companies, including NH Nonghyup Card, was 41.8375 trillion won, down 610.8 billion won (1.4%) from 42.4483 trillion won at the end of the previous month.
From the card companies' perspective, even if they raise funds by issuing card bonds, it is difficult to make a profit if they cannot extend loans. With card fees, a major source of revenue, declining, and with it remaining difficult to expand revenue in the card loan institutional sector, the slump in the card industry is expected to continue for the time being.
A card industry official said, "As high-rate bonds matured last month, the interest burden eased somewhat," adding, "However, as lending regulations have tightened, the size of card bond issuance is likely to decrease again."