South Korea credit crisis spreads with bond uncalled in first since 2009

South Korea’s credit market turmoil is continuing even after the authorities jumped into action to try to nip it in the bud. PHOTO: AFP

SEOUL – A South Korean insurer took the unusual step of delaying buying back perpetual bonds, in the first such case for the nation’s issuers since 2009, adding to signs of a crisis in the local credit market.

Heungkuk Life Insurance will postpone exercising a Nov 9 call option for its perpetual note issued in 2017 because it had to delay issuance of a planned US dollar hybrid securities to repay the existing bond due to market conditions, a spokesman said. It plans to exercise the call option, which it can do once every six months, in the future after selling dollar securities.

South Korea has been scrambling to prevent a credit market meltdown from sparking broader contagion, after local corporate bonds suffered one of the most rapid sell-offs in the past three months. The rout triggered by a default in the developer of Legoland Korea theme park is one of the worst in Asia’s local currency markets amid a broader fixed-income slump this year. 

In a particularly alarming development, yields on local commercial paper that companies use to raise funds for short-term payments like payroll have surged to a 13-year high. Meanwhile, spreads on won corporate notes have risen to the highest since at least 2010. South Korea’s offshore bonds, which had been considered a relatively safe bet in Asia, are also seeing a widening in yield premiums. 

South Korea’s credit market turmoil is continuing even after the authorities jumped into action to try to nip it in the bud. They have unveiled a 50 trillion won (S$49.8 billion) aid package for credit markets, while the Bank of Korea is expanding the range of bonds it will accept as collateral. And the banking regulator said last week that financial institutions will start paying 3 trillion won into a fund to stabilise credit markets.

Still, there have not been extensive defaults yet in South Korea’s credit market after the developer’s non-payment. The absolute yield levels in South Korea are still lower than in many other countries, and sell-offs in some other dollar bond markets globally have been even more abrupt recently. BLOOMBERG

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