{"id":2199347,"date":"2022-11-07T10:13:08","date_gmt":"2022-11-07T10:13:08","guid":{"rendered":"https:\/\/www.nknews.org\/koreapro\/?p=2199347"},"modified":"2023-04-05T16:11:02","modified_gmt":"2023-04-05T07:11:02","slug":"legoland-default-a-bleak-signal-for-south-koreas-corporate-bond-market","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2022\/11\/legoland-default-a-bleak-signal-for-south-koreas-corporate-bond-market\/","title":{"rendered":"Legoland default a bleak signal for South Korea\u2019s corporate bond market"},"content":{"rendered":"
The Bank of Korea began raising rates long before the U.S. Federal Reserve, and Korean borrowers have had to start living with rising rates. Now, the apparent default of the developer whose borrowing financed the construction of Legoland Korea, and problems with short-term borrowing in the corporate debt market more generally as rates rise, have heightened worries about the state of the market.<\/span><\/p>\n There are <\/span>concerns <\/span><\/a>in South Korea that otherwise reliable borrowers (investment-grade issuers) have had more trouble rolling over existing debt, or issuing new debt to meet their obligations (see this BOK <\/span>report <\/span><\/a>on liquidity risk). The size of new debt issuance in the corporate bond market also hit record <\/span>lows<\/span><\/a> in October, registering a net negative with corporations actually paying down debt.\u00a0<\/span><\/p>\n This is a <\/span>global problem<\/span><\/a> for corporate borrowers, but currently it appears to be causing more immediate concern within the Korean market than elsewhere.\u00a0<\/span><\/p>\n South Korean non-financial firms are more <\/span>heavily indebted<\/span><\/a> than firms in many other countries worldwide. Relative to profitability, however, firms in the ROK are still <\/span>among the better performers<\/span><\/a> in the OECD.\u00a0<\/span><\/p>\n But earnings are heading down, and combined with higher borrowing costs, South Korean firms are struggling with declining demand for their debts.<\/span><\/p>\n Some of this is driven by rising interest rates that make it more expensive for households, firms and governments to borrow, so it\u2019s not all that surprising that corporate bond yields would rise along with interest rates. But rates are not all rising evenly or at the same time.<\/span><\/p>\n The spreads, or difference in price, on Korean government debt to corporate debt across a range of maturities \u2014 the borrowing period \u2014 and credit ratings have <\/span>broadened substantially<\/span><\/a> in the last year. What this means is that it is getting far more expensive for companies to borrow now than it was a year ago, in absolute and relative terms.\u00a0<\/span><\/p>\n Further, Russia\u2019s invasion of Ukraine hit South Korea\u2019s energy market hard. This is not unique to South Korea, but the way Seoul has chosen to respond to this crisis breaks from what other countries are doing. Across the OECD, many <\/span>governments<\/span><\/a> have moved in to provide subsidies for people\u2019s energy bills. But in the ROK, subsidies are primarily provided via the country\u2019s state-owned energy utility, Korea Electric Power Corporation (KEPCO).\u00a0<\/span><\/p>\n KEPCO is not allowed to freely raise its prices in line with prevailing market conditions, and thus is making <\/span>large losses<\/span><\/a> that could total as much as 40 trillion won this year, or over $28 billion). These losses are financed primarily through debt issuance, and KEPCO is regarded as a premier debtor (AAA) because they <\/span>have<\/span><\/a> implicit and explicit government guarantees behind them.\u00a0<\/span><\/p>\n The company <\/span>issued<\/span><\/a> upward of 20 trillion won of debt in the first half of this year out of its total debt pile of over 50 trillion won as of late September. Its financials are <\/span>poor<\/span><\/a> to say the least.\u00a0<\/span><\/p>\n In fact, under current energy price regulations and the company\u2019s debt limits, it is predicted to go <\/span>bankrupt<\/span><\/a> early next year. Hence there is a need to change the law to allow it to borrow more (kicking the can down the road), raise energy prices (which would impact <\/span>inflation<\/span><\/a>) or subsidize it (explicitly socialize the costs of energy subsidies).<\/span><\/p>\n