S. Korean firms abandon dollar debt to tap record-low rates at home

SINGAPORE: South Korean companies are shunning international bond markets in favour of local-currency borrowing, shielding themselves from higher US interest rates and the deepest won slump in four years.

Foreign-currency issuance totaled US$5.59bil over the past three months, the slowest quarter in almost three years, according to data compiled by Bloomberg. Domestic corporate bond sales were 55.3 trillion won (US$47bil) in the same period, on track for the busiest 12 months since 2012, as onshore borrowing costs slid to record lows.

Strong demand from local debt investors is helping companies in Asia’s fourth-largest economy cut exposure to the weakening won after it slumped almost 6% against the dollar in the third quarter. Yields on three-year domestic notes touched an unprecedented 1.893% Wednesday as South Korea’s central bank holds its benchmark interest rate at a record low.

Borrowing costs in dollars are rising as traders price in a 41% chance the Federal Reserve will lift rates by December.

“It’s highly likely the won weakness will continue, so most Korean companies are more concerned about the impact of dollar strength on their dollar-denominated borrowings,” said Ik Sun Yoo, the head of investment strategy in Seoul at Shinhan BNP Paribas Asset Management Co, which manages some 36.6 trillion won of assets. “Concern about emerging market economic fundamentals and a stronger dollar will continue going into next year, considering the possibility of a Fed rate hike in the near term.”

Onshore liquidity will also help companies address the some US$100.55bil of bonds and loans that have to be refinanced before the end of 2016.

While foreign investors withdrew 216 billion won from South Korea’s domestic bond market in August, Financial Supervisory Service data show, inflows year-to-date are 2.01 trillion won, bringing the total amount of foreign money invested in Korean local bonds to 102.7 trillion won.

Record-low onshore borrowing costs aren’t expected to rise any time soon with the Bank of Korea likely to remain in easing mode amid few signs growth in China is stabilising, according to BNP Paribas SA.

Policy makers will probably cut their economic expansion forecasts to closer to 2% this month, senior economist Mark Walton wrote in a note last week, as weakness in Asia’s largest economy dragged exports down the most since 2009 in August. The central bank is currently forecasting growth this year of 2.8%.

“Domestic liquidity has been adequate to handle most Korean funding needs,” said Krishna Hegde, the Singapore-based head of Asia credit research at Barclays Plc. – Bloomberg