Concerns about a contraction in the corporate bond market have eased as the state-run Korea Development Bank and Industrial Bank of Korea (IBK) decided to keep this year's bond issuance at last year's level. As a clear preference for high-grade corporate bonds has emerged in the bond market recently, funding conditions for corporations with lower credit ratings are deteriorating rapidly. There were also considerable worries that if high-rated bonds from the development and Industrial Bank of Korea flood the market, they could siphon off market liquidity.
According to the financial sector on the 28th, Korea Development Bank recently held a board meeting and passed an agenda setting this year's issuance limit for industrial finance bonds (SanGeum bonds) at 80 trillion won for won-denominated bonds and $17 billion (about 24.55 trillion won) for foreign-currency bonds. The won-denominated SanGeum bond issuance limit was frozen from the previous year, while only dollar bonds increased by $2 billion. Last year, the issuance limit was raised by about 9 trillion won from the previous year.
Industrial Bank of Korea (IBK) also finalized at a recent board meeting this year's issuance limit for won-denominated small and midsize enterprise finance bonds (JungGeum bonds) at 271 trillion won. The amount is 2 trillion won higher than last year's 269 trillion won, effectively a freeze. Industrial Bank of Korea (IBK) has increased the JungGeum bond issuance limit by an annual average of 22 trillion won over the past five years from 2021 to last year.
Korea Development Bank and Industrial Bank of Korea (IBK), as state-run banks, have weak retail deposit-gathering functions and therefore issue special bank bonds to secure lending funds. As the role of state-run banks has expanded recently, the two banks have steadily increased their bond issuance.
The two banks will inject a total of 550 trillion won over the next five years into artificial intelligence (AI), semiconductors, small and midsize enterprises, and small business owners. Korea Development Bank will supply 250 trillion won and Industrial Bank of Korea (IBK) 300 trillion won, respectively. In the financial sector, there is analysis that it is unusual for both banks to freeze their bond issuance limits given the need to secure massive funding.
Market watchers say the pronounced preference for high-grade corporate bonds this year led to the freeze in issuance limits for state-run bank bonds. While investment money has been pouring into high-quality corporate bonds recently, unsold portions are occurring for corporate bonds from nonpreferred industries or non-investment-grade corporations. As a result, small and venture corporations with lower credit ratings are abandoning corporate bond issuance and are raising funds through other means, such as issuing short-term notes. According to the Korea Financial Investment Association's Bond Information Center, corporate bond issuance from the start of the year through the 23rd was 4.6504 trillion won. That is roughly half of the 8.4864 trillion won issued during the same period last year.
A source in the investment banking (IB) industry said, "If state-run bank bonds such as SanGeum or JungGeum bonds flood the market, there is a possibility it could strain bond supply and demand."