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How the Corporate Bond Market Changes in Rate Hike Cycles / May. 17, 2022
Recently, a sharp increase in the market interest rate has dwarfed the corporate bond market. The supply and demand imbalance of credit bonds has widened credit spreads, driving up financing costs through corporate bond issuance. In particular, Korea’s corporate bond market has seen the yield on issuance climbing and maturities getting shorter amid rising market interest rates since the second half of 2021. The impact of the upward trend in market interest rates varies by bond type. It tends to have a relatively limited impact on public placement bonds, while private placement bonds are faced with a sizable increase in financing costs and shorter maturities due to rate hikes. Looking forward, the market interest rate is likely to climb further, underpinned by changes in internal and external financial conditions. As the market for public placement bonds acts as a source of financing for companies with relatively strong credit quality, its exposure to rising interest rates would be limited. In addition, an increase in interest rates below a certain level is less likely to affect directly their financial performance. On the other hand, private placement bonds are used for financing by companies with lower ratings and thus, would be likely swayed by rate hikes. In this regard, what is needed is to step up management efforts for the sectors with poor credit quality in response to changing interest rates. Also necessary is to examine how changing conditions in Korea and abroad such as rising interest rates would influence the entire economy including the production and export sectors and to strengthen economic fundamentals.
Rising Credit Risk in China’s Corporate Bond Market: Background and Implications / Nov. 23, 2021
The default risk of China Evergrande Group, one of China’s real estate giants, is raising concerns over the corporate bond market in China. Having emerged as the largest in Asia, China’s corporate bond market has grown thanks to the government policy for nurturing the market and the greater demand of firms and financial institutions for funding. However, some firms have defaulted on corporate bonds since 2015 amid growth of the credit bond market. In 2018, an increasing number of privately owned firms began to default on bond payments, and 2020 saw a rise in defaults of state-owned enterprises. The surge in corporate bond defaults can be attributed to regulatory measures for curtailing shadow finance and the government’s greater tolerance towards defaults. As higher leverage arises from firms pursuing borrowing-based growth, such a regulatory shift has affected credit ratings in the corporate bond market. In addition to a large proportion of property-backed bonds in the market lacking advanced credit rating infrastructure, the policy to curb real estate prices serves as another factor behind the China Evergrande Group fiasco, further raising the possibility of other property firms’ bankruptcy. Nevertheless, the ratio of defaulted bonds to China’s total corporate bond issuance amount remains low. Except for a few business categories, the overall conditions in the credit bond market show signs of improvement, which could lower concerns over the spread of systemic risks arising from a series of massive defaults. Furthermore, most corporate bonds are held by domestic investors and thus, bond defaults are likely to have a limited impact on overseas investors. However, greater credit risk posed by a growing number of firms going bankrupt could deteriorate the soundness of China’s financial institutions, potentially having an adverse impact on other economies.
ESG Bonds: The Current State and Facilitating Policies / Jun. 15, 2021
With the rising attention to ESG investing and ESG management among firms and financial institutions, the issuance of ESG bonds went up dramatically. In Korea’s ESG market, ESG-certified social bonds represent a disproportionately dominant form of ESG bonds. Furthermore, the proceeds of ESG bonds are mainly used for existing projects instead of new ESG investing. This weakens ESG bonds’ function as a financing tool for new ESG projects. More recently, however, some private sector firms and financial institutions are increasing their ESG issuance for a diverse set of ESG projects, which is expected to increase new ESG investing via bond issuance.A brief look at ESG bonds reveals that those bonds, except for the ESG certification process, have very similar maturities and credit ratings than ordinary bonds do. Moreover, the two types of bonds are similar in terms of price discovery, implying that market conditions and demand—instead of ESG-specific factors—have a critical impact.Korea’s ESG market will be more sustainable only if more firms and financial institutions issue more bonds investing in new ESG projects. On top of that, the market also needs some plans to broaden the pool of ESG bond investors. Institutional investors are needed to set up socially responsible investing standards, while the market needs an investor incentive for enhanced investment performance. Also necessary are institutional tools such as a clear legal and institutional basis on ESG bonds, expanded information provision, and a stronger ESG bond certification system all of which will improve investor confidence in ESG bonds.
Facilitating Indirect Real Estate Investment via REITs / Jan. 05, 2021
Korea has so far employed REITs mainly for two purposes─a privately placed investment option for institutional investors, and a tool for housing policy such as public housing─instead of providing ordinary investors a greater range of indirect investment opportunities for holding real estate. However, Korea’s listed REITs market is recently gaining activity as more and more REITs are going public and drawing attention of ordinary investors. Nevertheless, Korea’s REITs market still lacks a market structure that can meet ordinary investors’ diverse demand for indirectly investing in real estate. Currently, most REITs take the form of private placement and the market for listed REITs is quite small with a very limited range of investment targets. Currently, REITs are subject to regulatory overlaps and a tough listing standard without sufficient regulatory support and incentives for listing. Even after being listed, REITs have difficulty in purchasing new shares for growing their size due to some regulatory constraints. For nurturing a well-functioning REITs market, the current market structure needs reshaping in a way placing listed REITs in the center. Long-term development of the market would be possible only if the market provides investors more indirect investment opportunities and proper returns that suit investor demand. This requires the market to list more REITs based on high return properties, which would widen investor choices. Also necessary is a plan to increase the size of the REITs already listed. The current “one REIT for one property” structure needs improving so that a listed REIT can include new assets. Another alternative is a regulatory improvement to permit a multi-tier FOF structure for listed REITs, which would enhance scalability. Along with that, it’s worth benchmarking overseas cases where an incentive is provided to facilitate the market for listed REITs.