As corporate bond yields rise in the wake of the Iran war, corporate bond issuance, a key funding channel for corporations, fell in the first quarter. By contrast, stock-linked financing, such as paid-in capital increases or exchangeable bonds (EB) issuance, is gaining momentum on the back of a buoyant stock market.
According to the Korea Financial Investment Association on Apr. 6, corporate bond issuance in the first quarter was 36.4573 trillion won, down about 19.7% from the same period a year earlier (45.4184 trillion won). Last year's annual corporate bond issuance totaled 129.3355 trillion won.
Corporate bond issuance had been on the rise for the past three years but turned lower this year. Corporate bond issuance was 76.7492 trillion won in 2022, 89.3771 trillion won in 2023, 120.9125 trillion won in 2024, and 129.3355 trillion won in 2025, marking three consecutive years of increases.
Higher interest rates are cited as the reason for the decline in corporate bond issuance. Jeong Hwayoung, head of the fixed income research center at the Capital Market Research Institute, said, "From the issuer's perspective, the burden has grown as government bond yields, which serve as the benchmark for corporate bond issuance rates, have been swinging sharply even within a day due to the impact of the Middle East war," adding, "Investors are also worried that if rates keep rising, bond prices could fall."
Corporate bond yields have continued to climb as inflationary pressures rose after the U.S.-Israel war. On the 23rd of last month, the AA- rate for corporate bonds (unsecured three-year) hit a record high of 4.197%, the highest in about two years. It then edged down to around 4.093% as of the 3rd.
The relative decline in the appeal of bond financing due to the strong stock market is also seen as a factor. A professor of economics said, "As the stock market has remained strong, an environment has formed in which corporations can raise funds relatively easily," adding, "This has reduced demand for corporate bond issuance."
Meanwhile, corporations' stock-based funding is increasing. Hanwha Solutions decided to raise 2.4 trillion won through a paid-in capital increase, and HD Korea Shipbuilding & Offshore Engineering issued 3 trillion won in EBs backed by shares of its subsidiary HD Hyundai Heavy Industries as the underlying asset.
Analysts say corporations are turning to paid-in capital increases or EB issuance because they can lower issuance costs in a high-rate environment and relatively reduce liability burdens. A paid-in capital increase allows direct cash to be secured from shareholders, while EB issuance can raise funds at rates below the market in return for offering stock exchange rights.
For example, the latest EB from HD Korea Shipbuilding & Offshore Engineering set both the coupon rate and the yield to maturity at 0%. If the same amount were raised through corporate bonds at an annual rate of about 4%, a simple calculation shows about 120 billion won in annual interest expense. On a five-year maturity basis, a simple calculation suggests around 600 billion won in financial expenses could be saved.
Cases of raising funds through price return swap (PRS) contracts are also being observed. In February, SK raised 1.25 trillion won through a PRS contract for a 13.9% equity stake in its subsidiary SK Biopharmaceuticals. PRS is a derivative contract that uses held shares to secure cash and exchanges returns with a financial company based on the price changes of those shares, and it has the advantage of not being added to the liability ratio.
However, such stock-based funding is cited as a burden because it can dilute the equity value of existing shareholders. In fact, after news of Hanwha Solutions' paid-in capital increase and HD Korea Shipbuilding & Offshore Engineering's EB issuance broke, those stocks plunged in the stock market.
A capital market official said, "Stock-based funding has the advantage of lowering financial expenses, but the market may view it as damaging shareholder value," adding, "It is important to choose a funding method that fits corporations' circumstances."