[Edaily Marketin LEE GEON-EOM Reporter] The “rich get richer, poor get poorer” phenomenon based on credit ratings has become even more pronounced in the public corporate bond market during the first half of the year. With the overall public corporate bond market shrinking significantly, even the remaining demand has been concentrated on “AA-” rated bonds and higher, creating a situation where the middle segment has completely collapsed. Even as the total issuance volume declined, the share of high-grade bonds actually expanded, while the presence of non-investment-grade bonds rapidly faded, further deepening polarization within the credit market.

Investor Sentiment Flows to High-Grade Bonds… A and BBB-Grade Bonds Left Behind

According to the Financial Supervisory Service’s electronic disclosure system on the 13th, public bond issuance in the first half of this year totaled 21.0297 trillion won, a 39% decrease compared to the same period last year (34.472 trillion won). As the market contracted, the trend of selective capital allocation became even more pronounced. Looking at the share of each credit rating in the overall market, funds have concentrated on “AA-” and higher—the threshold for high-quality bonds—indicating that the credit gap has widened.

In fact, the “AA-” rating—which accounted for the largest volume of issuances—represented 36.5% of total issuance volume in the first half of this year. This represents a 7.6 percentage point (p) increase compared to the same period last year (28.9%). The share of the “AA” rating—one notch higher—also expanded from 25.7% to 30.1%. Even as the overall market size shrank significantly, the AA and AA- ratings held their ground, accounting for two-thirds (66.6%) of total corporate bond issuance.

In contrast, the presence of mid-tier bonds rated A+ or lower faded as investor sentiment froze rapidly. The issuance volume of ‘A+’ rated corporate bonds in the first half of this year was 2.713 trillion won, a 44.4% decrease from 4.88 trillion won in the same period last year; moreover, their share of the overall market fell by 1.3 percentage points from 14.2% to 12.9% over the same period. The shares of ‘A’ and ‘A-’ rated bonds also fell by 0.2 percentage points and 0.7 percentage points, respectively, compared to the same period last year, to 7.4% and 3.1%.

The situation is even more severe for the “BBB+” rating, which marks the entry point into the non-investment-grade category. In the first half of this year, the issuance volume for BBB+ ratings plummeted by 68.6% to 260 billion won compared to the same period last year (828 billion won), and its market share was cut in half, falling from 2.4% to 1.2%. The only exception was the “BBB” rating, whose market share rose from 0.7% to 1.5%; however, since the absolute volume was only 315 billion won, this increase is likely a statistical illusion caused by the base effect.

Rising Funding Rates Compounded by Credit Shock

Amid an overall decline in public bond issuance, the sharp rise in funding rates is the primary factor behind the particularly pronounced contraction in the share of non-investment-grade bonds. As of the closing price on the 7th, the yield on ‘A-’ rated corporate bonds stood at 5.59% per annum, a sharp rise of 107 basis points (1 bp = 0.01 percentage point) from 4.52% at the beginning of the year.

During the same period, the yield on ‘BBB’-rated corporate bonds also soared by 108 basis points, from 7.81% per annum to 8.89% per annum. In particular, the yield on ‘BBB-’ bonds—the lowest non-investment-grade rating—surpassed the 10% mark. Analysts note that the burden of funding costs has snowballed in just half a year, acting as a deterrent that is causing issuers to hesitate to enter the corporate bond market at all.

Cooling demand is also exacerbating the situation. Following JR Global REIT’s filing for rehabilitation proceedings in April, a series of defaults and court-ordered receivership filings by affiliates of the Joongang Group in June caused investor sentiment toward non-investment-grade bonds to freeze rapidly. Both incidents share the commonality of being credit events that arose among companies with credit ratings ranging from ‘A-’ to ‘BBB,’ which is believed to have further heightened investors’ wariness toward that rating range.

Given this situation, analysts both inside and outside the credit market warn that unless the “fault line” near the threshold for investment-grade status is resolved, the structural liquidity crunch facing mid-sized companies could become the market’s biggest risk in the second half of the year.

A bond market official stated, “As market anxiety grows, institutional investors are strictly setting the lower limit for acceptable risk at ‘AA-’,” adding, “In a climate where investor sentiment is so frosty that even large corporations struggle to secure investment-grade ratings based solely on their own creditworthiness without external guarantees, bonds rated A or below are being completely excluded from consideration.”

The official continued, “As K-shaped polarization deepens, a phenomenon of demand disruption—where investors won’t even consider bonds below a certain rating—is becoming entrenched,” and predicted, “Structural changes, such as rising financing costs for A- to BBB-rated companies with limited liquidity management capabilities and the collapse of the mid-tier of the issuance market, are likely to persist for the time being.”