Korean corporations shifted funding strategies from corporate bond issuance to bank loans during the first half, according to analysis by Lee Kyung-rok, a researcher at Shinhan Securities. The shift occurred as corporate bond rates rose above bank lending rates, making direct financing more expensive than indirect financing. Government regulations restricting household lending pushed banks to expand corporate loan operations, creating favorable borrowing conditions for large enterprises seeking cost-efficient funding alternatives.
Corporate Bond Market Records KRW 5.7 Trillion Net Redemption in H1
The first half saw corporate bond issuance total KRW 46.3 trillion, resulting in net redemptions of KRW 5.7 trillion after accounting for maturities, according to the Shinhan Securities report. Issuance volume declined by KRW 10 trillion compared to the prior year's first half figure of KRW 56.3 trillion.
Lee noted the contrast with historical patterns where corporations typically secured funding through large-scale net issuance in the first half. The researcher stated the net redemption level fell significantly below the KRW 171.2 billion recorded in 2022, a period marked by severe supply-demand instability amid macroeconomic uncertainty.
Corporate Bond Rates Exceed Bank Loan Rates
AA- rated 3-year corporate bonds currently trade at 4.4%, while bank corporate loan rates range from the high 3% to low 4% level. The rate inversion prompted corporations to reduce interest burdens by diversifying funding structures toward commercial paper, short-term bonds, and bank loans, according to the analysis.
Lee identified the rate gap between corporate bonds and bank lending as the primary driver of the issuance market contraction.
Banks Expand Corporate Lending Amid Household Loan Restrictions
Government restrictions on household and mortgage lending—previously core revenue sources for banks—accelerated the funding shift. Lee stated banks increasingly turned attention to the corporate loan market and expanded lending operations to secure demand from large enterprises.
The researcher noted that given macroeconomic conditions offer limited incentive for significant market rate declines, large corporations' preference for bank loans based on cost efficiency will continue for the time being.
FAQ
What caused Korean corporate bond net redemptions in the first half?
Corporate bond issuance totaled KRW 46.3 trillion in the first half, resulting in KRW 5.7 trillion net redemptions after maturities. The contraction occurred as AA- rated 3-year corporate bond rates at 4.4% exceeded bank corporate loan rates in the high 3% to low 4% range, making bank borrowing more cost-efficient.
Why did banks increase corporate lending activity?
Government regulations restricting household and mortgage lending reduced banks' traditional revenue sources. Banks responded by expanding corporate loan operations to secure lending demand from large enterprises, according to Lee Kyung-rok's analysis at Shinhan Securities.
How does the rate gap affect corporate funding choices?
The rate differential between 4.4% corporate bonds and sub-4% bank loans led corporations to diversify funding toward commercial paper, short-term bonds, and bank borrowing. Lee stated this cost-driven preference for bank loans will persist given limited prospects for significant market rate declines.
