How a liquidity crunch in South Korea started at Legoland

South Korean firms are struggling to refinance maturing money owed after a sell-off was triggered by the default of a Legoland theme park developer and the announcement by a midsized insurer that it might not train a name choice on its perpetual notes.

Yields on top-rated five-year Korean company debt have surged 157 foundation factors within the three months by way of October — the worst spike on file — with widening credit score spreads accounting for about one-third of the transfer.

The nation’s offshore bonds, seen as a comparatively secure wager within the area, are seeing spreads widen, whereas the fee to insure five-year sovereign debt in opposition to default has virtually doubled since mid-September.

Policymakers have launched a collection of measures to shore up the Korean credit score market, however consultants warn that an growing variety of company defaults subsequent yr will likely be an additional drag on the nation’s financial slowdown. With central banks elevating charges worldwide, world development is anticipated to gradual sharply in 2023, risking a “devastating” impression on individuals in rising markets and growing economies, based on the World Financial institution.

Lee Sang-ho, a director on the Federation of Korean Industries, a foyer group for large conglomerates, stated “market liquidity is drying up, making it troublesome for a lot of firms to promote bonds and pay again maturing debt”.

“Firms are struggling to safe extra liquidity as this credit score squeeze is certain to result in much less funding and hiring, weighing on the general economic system,” he added.

A missed Won205bn ($150mn) bond cost in September by the developer of the Legoland Korea theme park outdoors Seoul set off the preliminary turmoil.

However that changed into a market panic when Gangwon province, the native municipality, steered it might renege on a assure over the debt. That prompted credit standing companies to downgrade the bond from an A1 to a D score virtually in a single day, casting doubt on dozens of comparable, extremely rated obligations. Gangwon has since stated it might repay the developer’s debt.

“The credit score squeeze got here sooner than anticipated because the Legoland default shook all the bond market,” stated Hwang Se-woon, an analyst at Korea Capital Market Institute.

“Firms will be capable of climate the storm till the tip of this yr or early subsequent yr, however we’re prone to see an intensive wave of company defaults within the second half of subsequent yr after rates of interest peak within the first quarter,” he added.

The Korean authorities introduced a Won50tn bundle to shore up credit score markets final month, underneath which it would purchase a variety of bonds and industrial paper to stabilise the market.

The Financial institution of Korea has launched a brief bond-buying program price Won6tn, whereas native banks have additionally pledged to contribute billions of {dollars} to purchase company debt.

Heungkuk Life, a midsized insurer, additionally paid again a $500mn perpetual bond due on Wednesday. It had despatched tremors by way of the market when it first referred to as the bond, however then tried to cancel the decision after it struggled to lift alternative capital.

Heungkuk lastly repaid the bond after help from its mum or dad firm and different monetary establishments allowed it to satisfy minimal solvency necessities.

Absolute yield ranges in South Korea stay decrease than in lots of different nations. However spreads on industrial paper are at elevated ranges and almost Won45tn of company bonds will mature between now and mid-2023, based on the Korea Monetary Funding Affiliation.

Min Ji-hee, a credit score analyst at Mirae Asset, cautioned that the credit score squeeze may worsen if the BoK opted for one more outsized price improve later this month.

“The present liquidity crunch will not be as severe as that seen in previous crises, however we’re prone to see extra liquidity issues going ahead,” she stated.

Policymakers additionally face a tricky balancing act as they attempt to curb inflation by way of financial tightening and shore up the credit score market by pumping extra liquidity.

“The federal government will discover it harder to answer the credit score squeeze as actively because it did through the pandemic,” stated Park Chong-hoon, head of Korea and Japan analysis at Commonplace Chartered.

Dutch financial institution ING stated the latest liquidity crunch was a “main concern” for Asia’s fourth-largest economic system, however was unlikely to pose a systemic danger to the monetary system. It added that the general debt ratio of Korean firms had fallen from 105.6 per cent within the first quarter of 2015 to 91.2 per cent within the second quarter of 2022.

“It’s unlikely it will result in large-scale insolvency of the company bond market,” Kang Min-joo, senior economist for Korea and Japan at ING, wrote in a report this week. “However it will damage near-term development and drag the economic system into recession subsequent yr.”