Major builders are continuing to draw strong demand in the corporate bond market. As investors flock to bookbuilding, some are more than doubling their issuance targets. Analysts say stronger demand for builders' corporate bonds stems from a recovery in the construction cycle this year and more investors seeking stable havens amid an interest-rate cutting phase. Builders are expected to be able to raise funds relatively easily in the capital market through the first half of next year.
On the 13th, according to the Financial Supervisory Service and the construction industry, the unsecured straight bonds issued by Hyundai E&C (AA-) on the 3rd totaled 310 billion won. Hyundai E&C had planned to issue 200 billion won, but amid strong demand it increased the deal by more than 100 billion won.
The bonds issued this time are green bonds, issued to raise funds for investment in eco-friendly projects such as renewable energy and climate-change response. Hyundai E&C plans to use the proceeds to pay costs related to a green building certification project and to make an equity investment in the 350 MW Lucy solar power plant being established in Concho County, Texas. In bookbuilding on Aug. 26, orders surged to 1.09 trillion won, more than five times the 200 billion won target. The coupons were set at 2.779% for two years, 2.912% for three years, and 3.169% for five years, all 10 bp below the individual fair value (the average rate from private bond evaluators).
Builders with lower credit ratings than Hyundai E&C are also popular in the corporate bond market. SK ecoplant (A-) issued bonds on Jul. 25, originally targeting 130 billion won but doubling the size to 260 billion won. By maturity tranche, the one-year, 1.5-year, and two-year notes all saw successful upsizing. After bookbuilding drew 285 billion won in orders—more than six times the offering size—the bonds priced at 3.522% to 4.284%, below fair value.
The popularity of SK ecoplant's bonds is also linked to the company's expansion into higher value-added businesses. SK ecoplant incorporated SK Airplus and Essencore as subsidiaries last year, and this year plans to complete the incorporation of four corporations—SK trichem, SK resonac, SK materials JNC, and SK materials performance. All of the subsidiaries being added are semiconductor-related corporations with high profitability. A SK ecoplant official said, "We decided to upsize the deal because investors showed strong interest from the bookbuilding stage."
POSCO E&C (A+) also doubled the size of the bond it issued on Apr. 15 to 200 billion won from a 100 billion won target. It increased the two-year tranche (65-1) planned at 60 billion won to 100 billion won, and the three-year tranche (65-2) planned at 40 billion won to 100 billion won.
Market experts expect the timing of rate cuts to continue for the time being, keeping builders in favor in the corporate bond primary market. Bank of Korea Governor Lee Chang-yong noted at a monetary policy direction press briefing on the 28th of last month that it is highly likely the rate-cutting stance will be maintained through the first half of next year. When rates are falling, funds tend to flow into the corporate bond market, where yields are even slightly higher.
Lee Seung-jae, an analyst at iM Securities, said, "Considering the BOK governor's remarks, rate cuts are likely to continue through the first half of next year," adding, "Corporations will be able to issue bonds at lower rates, and investment demand will increase, sustaining a favorable funding environment."
A bond market official said, "With market conditions stable, builders' corporate bonds will generally be issued and absorbed smoothly unless a given corporation faces very specific bad news."
Meanwhile, as funds crowd into corporate bonds, the credit spread—the difference between corporate bond yields and Treasury yields—is narrowing. That shows corporate bonds are gaining popularity. According to the Korea Financial Investment Association, on Aug. 29, the last trading day of last month, the spread between three-year Treasurys and high-grade corporate bonds (AA-) was 0.466 percentage point (p), but as of the 11th it had narrowed to 0.455%p.