SK hynix, which has recently ramped up purchases of credit bonds, is said to have abruptly withdrawn some investments right before issuance, drawing attention to the reasons behind the move. As the timing coincides with its preview that it will unveil additional shareholder-return measures in the third quarter, some interpret it as a shift in its surplus cash management strategy to secure cash for dividends or share buybacks and cancellations.
According to the bond market on the 13th, SK hynix is said to have canceled plans on the 10th to buy some credit bonds. Considering the bonds were scheduled to be issued on the 11th, the withdrawal came just one day before issuance.
Behind SK hynix's surge in bond investing is a rapid increase in cash thanks to the semiconductor boom. SK hynix's cash and cash equivalents at the end of the second quarter this year stood at 88 trillion won, up 33.6 trillion won from just three months earlier. Rather than leaving funds not immediately used for capital expenditures or shareholder returns only in bank deposits, the company is putting them into high-quality bonds that are relatively higher yielding and easier to liquidate when needed.
In particular, given the nature of semiconductor corporations that frequently execute large-scale capital expenditures, short-maturity, highly liquid bonds can serve as a "parking" tool to temporarily roll surplus cash until it is used.
The investment universe has also diversified. Starting early this year with short-maturity instruments such as commercial paper (CP) and electronic short-term bonds, SK hynix expanded its purchases to bonds and debentures, bank bonds, securities bonds, bonds of specialized credit finance companies, and corporate bonds. The market estimates that SK hynix has bought about 20 trillion won of credit bonds so far this year. It is said to have mainly selected and invested in high-grade credit with ratings of AA or above.
With large sums flowing in at once, SK hynix has established itself as a key source of demand in the issuance markets for bonds and debentures and high-grade corporate bonds. That is why the market views this withdrawal of investment right before issuance as highly unusual.
A bonds analyst at a securities firm said, "If the company said it would not invest after issuance was largely set, it can be seen as somewhat unusual," adding, "Given that SK hynix has accounted for considerable demand in the issuance market recently, if such moves continue, it will not be good for credit investment sentiment over the long term."
However, some say SK hynix's halt in investment does not immediately translate into funding disruptions for issuers. That is because the bonds SK hynix has mainly been buying are high-quality issues with relatively solid demand from other institutions.
An industry official said, "It is true that funding becomes easier for issuers if SK hynix takes the volume," but added, "Since it has mainly invested in high-grade bonds rated AA0 or above, even if SK hynix steps back, other institutions can step in. There may be temporary funding burdens, but it is unlikely that funding channels themselves will be blocked."
The market is also watching whether the decision is related to shareholder returns. SK hynix recently decided on a quarterly dividend of 375 won per common share. The total dividend is about 273.3 billion won. Separately, within 50% of this year's free cash flow (FCF), it is reviewing additional dividends or share buybacks and cancellations, and plans to announce specific additional shareholder-return measures in the third quarter.
Bond investment is also a cash management tool that raises the company's asset return through interest revenue. Therefore, if it rapidly reduced existing investments in financial assets to fund shareholder returns, some note it is necessary to examine how systematically it allocated funds in advance for investments and shareholder returns.
Another analyst at a securities firm said, "Bond investment is an auxiliary means to manage surplus cash rationally, while dividends or share buybacks affect shareholders more directly," while adding, "It is a stretch to link this single case to a capital allocation problem, but if such instances recur multiple times, criticism could arise in terms of consistency in cash management."
Another bonds analyst at a securities firm said, "It is hard to see SK hynix halting bond investments because of problems with profitability or business viability," adding, "It could be closer to a one-off happening arising in the cash management process of a corporations that is not a specialized financial company." The analyst added, "However, among financial institutions, such things rarely occur right before issuance, so there is room for criticism in terms of market trust."
SK hynix says the investment halt did not overturn a confirmed purchase commitment. A SK hynix official said, "For matters the company has decided on and committed to, we buy 100%."