[Edaily Marketin, Reporter Lee Geon-eom] Investor sentiment in the non-investment-grade bond market is rapidly freezing up following back-to-back restructuring filings by JR Global REIT and the Joongang Group. Immediately after the JR crisis shook the most vulnerable link in the high-yield market, the shock of the Joongang Group’s default has compounded the situation, effectively drying up the lifeline for BBB-rated companies pushed to the brink. Concerns are mounting that these consecutive major setbacks—which have gone beyond a simple aversion to non-investment-grade corporate bonds to act as a “trigger” spreading individual credit concerns across the entire market—could dampen the vitality of the overall corporate bond market in the second half of the year.

According to BondWeb on the 16th, the secondary market yield on 3-year “BBB-” rated corporate bonds stood at 10.170% per annum based on the previous day’s closing price. This represents a sharp rise of 87.8 basis points (1 bp = 0.01 percentage point) compared to the end of last year (9.292%). In particular, yields have risen by an additional 18.9 basis points since April 28—the day after JR Global REIT filed for rehabilitation—indicating a trend where yield spikes intensify whenever major credit-related setbacks occur. During the same period, even interest rates for “BBB+” and “BBB0” ratings soared to 7.435% and 8.794% per annum, respectively, causing the burden of funding costs to rise sharply across the entire BBB-rated spectrum.

The credit spread—which reflects the interest rate differential between investment-grade and non-investment-grade bonds (relative to 3-year government bonds)—has also widened to 642 basis points for BBB- rated bonds. The spreads for BBB+ and BBB0 ratings have reached 398 basis points and 505 basis points, respectively, indicating that risk-averse sentiment is squeezing the non-investment-grade bond market as a whole.

JR Shock Lingers as Joongang Group Adds ‘Insult to Injury’

The credit industry views the JR Global REIT crisis that occurred last April as having struck the weakest link in the non-investment-grade market, which ultimately led to Joongang Group’s series of applications for court-supervised restructuring (corporate rehabilitation proceedings) in June, creating a domino effect.

Previously, on April 27, JR Global REITs filed for corporate rehabilitation with the Seoul Bankruptcy Court after failing to repay the principal and interest on 40 billion won in corporate bonds. This was due to a sharp decline in the asset value of its core asset, the Finance Tower in Belgium, which caused it to violate its loan-to-value (LTV) covenants, and because it faced a “cash trap”—a situation where rental income is prioritized for debt repayment rather than other purposes.

Consequently, amid a sharp deterioration in the health of the non-investment-grade market, JTBC defaulted on its securitized loan repayment on the 12th. Subsequently, on the 14th, major shareholders—including Joongang Holdings, Contentree Joongang, Megabox Joongang, and Joongang P&I—filed for rehabilitation, and on the 15th, JTBC also applied to the Seoul Rehabilitation Court to initiate rehabilitation proceedings, causing liquidity risks across the entire affiliate group to materialize all at once.

Individual Financial Weaknesses Act as a Trigger for the Entire Market

Market analysts suggest that as this credit shock spreads into a general aversion toward non-investment-grade bonds, the fundamental weaknesses of individual companies are acting

as

a trigger that heightens caution across the entire corporate bond market.

A bond market official stated, “The Jungang Group crisis stems from the fact that hundreds of billions of won poured into the acquisition of a U.S. platform company several years ago quickly turned into non-performing loans, reaching a point where normalization is virtually impossible,” adding, “Fundamental problems at individual companies, combined with a fragile market environment, are rapidly cooling investor sentiment toward non-investment-grade bonds across the board.”

While the fallout may not immediately spread to investment-grade bonds, observers note that dark clouds are gathering over the entire corporate bond market for the second half of the year. Another bond market official noted, “While investor sentiment will freeze for the time being, limited to BBB-rated bonds due to the Central Group crisis, we’ll have to wait and see if this spreads to the investment-grade market.” However, they pointed out, “Amid a series of credit issues being interpreted as negative signals for the market, and considering the trend toward interest rate hikes and the flow of funds driven by the booming stock market, this will place significant supply-and-demand pressure on the entire corporate bond market in the second half of the year.”

A Market Where Both Issuers and Investors Have Turned Their Backs

The high likelihood of interest rate hikes is another factor fueling uncertainty. With interest rates showing little sign of falling, companies forced to bear high financing costs find the very act of issuing corporate bonds a burden. The financial investment industry believes there is a high probability that the Bank of Korea will raise the benchmark interest rate to 3.00% by the end of the year.

From the investors’ perspective, although non-investment-grade companies are offering yields approaching double digits, they judge these rates to be unattractive given the heightened risks, such as deteriorating corporate fundamentals. This is because, with assets like stocks that offer relatively higher returns readily available, there is little incentive to take on the risk of holding non-investment-grade bonds.

A credit analyst at a securities firm stated, “A vicious cycle is repeating itself, with issuers hesitating due to cost burdens and investors keeping their wallets closed because of heightened risks, thereby exacerbating the overall supply-demand mismatch in the market.” The analyst added, “Unless domestic and external uncertainties subside, the credit market’s slump in the second half of the year is bound to continue for the time being.”