[Edaily Marketin, Reporter Lee Geon-eom] #Following a series of restructuring filings by JR Global REIT and affiliates of the Joongang Group, investor sentiment toward non-investment-grade bonds has frozen solid, putting companies on the verge of being downgraded from the A- threshold on high alert. This is because fears are growing that even a single credit rating downgrade could result in immediate expulsion from the corporate bond market.

In particular, while companies could previously count on underwriters to fully underwrite their bonds even if they fell into the non-investment-grade category, there is now a prevailing sentiment that even securities firms—paralyzed by the fear of unsold inventory—are increasingly reluctant to underwrite BBB-rated issuances. This has led to speculation that these companies’ access to funding channels could effectively be shut down entirely.

Just One Notch Down… Fear of Funding Cutoffs if Ratings Fall to BBB

According to the credit rating industry on the 18th, the three major domestic credit rating agencies—Korea Corporate Rating (KCR), Korea Credit Rating (KCR), and NICE Credit Rating (NICE)—have assigned a credit rating (including issuer rating) of “A-” with a “Negative” outlook to a total of nine companies (excluding duplicates).

The ‘A-’ credit rating is the lowest tier of the investment-grade A category; it represents the “last line of defense,” meaning that a drop of just one notch would push these companies into the non-investment-grade (speculative-grade) BBB+ category. Since a “Negative” outlook indicates a high likelihood of a credit rating downgrade within the medium term if downward pressure is not alleviated, these companies are effectively teetering on the brink of a downgrade.

Looking at the details, Korea Ratings assigned the ‘Negative’ outlook to the most companies—six in total: Daishin Savings Bank, Kiwoom Savings Bank, Hanwha Savings Bank, Shinhan Asset Trust, SK PIC Global, and Pulmuone Foods. Korea Ratings assigned a “negative” outlook to four institutions: △Moolim Paper, △Shinhan Asset Trust, △SK IET Technology, and △Yeocheon NCC. Korea Credit Rating Agency (KCRA) issued a “negative” outlook for two institutions: △Moolim Paper and △SK PIC Global.

The market anticipates that these companies will face significant difficulties in raising funds if their credit ratings are downgraded to BBB. While the issuance volume of these nine companies alone is not large enough to shake the entire credit market, there is considerable concern that a downgrade to BBB-grade could spread the shock throughout the market. This is because, in addition to demands for early redemption resulting from the credit rating downgrade, new issuances in the corporate bond market could be completely blocked, potentially triggering a market freeze.

In fact, the case of Yeocheon NCC—which was recently downgraded to BBB+ by Korea Ratings—clearly illustrates this “downgrade fear”: the early repayment trigger for its 400억 won private placement bond was activated, putting the company at risk of a chain reaction of events of default (EOD).

A credit analyst at a securities firm noted, “The pool of companies currently carrying a ‘negative’ outlook on their A- ratings, or the volume of their issuances, is not enormous,” but added, “If even these companies are actually downgraded to BBB-level, the ripple effect on the credit market as a whole will inevitably be much greater.”

The

Butterfly

Effect

of

the Joongang Group Crisis… Even Securities Firms Shying Away from

“Full Underwriting” This is why the market views the risk of their downgrades as the biggest flashpoint in the corporate bond market for the second half of the year. This is because the BBB-rated market—where these issuers will enter immediately after a downgrade—is already mired in an uncontrollable credit crunch. In fact, investor sentiment in the non-investment-grade bond market has frozen completely due to the aftermath of JR Global REIT’s filing for rehabilitation in April and the recent rehabilitation proceedings involving major affiliates of the Joongang Group.

Just looking at the current yields on BBB-rated bonds—such as those issued by Yeocheon NCC, E-Land World, and Lotte Property & Casualty Insurance—shows that they have surged to 10–12% per annum since the Jungang Group crisis. Since bond prices fall as yields rise, this sharp spike in yields fully reflects the extreme panic among investors triggered by a wave of panic selling.

In particular, while previously companies downgraded from A- to BBB+—and thus falling into speculative-grade territory—could still expect some demand for non-investment-grade bonds from high-yield funds and other sources, the recent series of events has made it difficult to expect participation not only from individual investors but even from institutions that typically hold non-investment-grade bonds.

In other words, for A-rated companies with a negative outlook, the structural fear—that even a single-notch downgrade would not only make them targets for forced selling by institutions but also lead to their “immediate expulsion” from the new capital-raising market—has already become a reality.

Even within the investment banking (IB) industry, there is a growing consensus that if an A-rated company is downgraded to speculative grade, it will be nearly impossible to find a lead underwriter willing to act as a “rescue pitcher” for its financing needs. Even if securities firms underwrite public bond offerings on a firm-commitment basis, they ultimately must offload the inventory by reselling it to the retail (individual investor) market; however, given the current extreme freeze in investor sentiment toward non-investment-grade bonds, even this is practically impossible.

An IB industry insider noted, “With investor sentiment in the credit market recently freezing up, it’s difficult to expect underwriters to fully underwrite BBB-rated issues,” adding, “In the past, securities firms would inevitably take on full underwriting of non-investment-grade bonds due to competition over performance, but in a situation like this, where the risk of unsold inventory is high, even major firms are quite reluctant to take on BBB-rated deals.”