[Edaily Marketin, Reporter LEE GEON-EOM ] Analysts say that the “default rate reversal”—a phenomenon in which defaults on investment-grade corporate bonds have outpaced those on speculative-grade bonds since the start of this year—is further dampening investor sentiment toward non-investment-grade bonds. The traditional investment strategy for non-investment-grade bonds—which involved accepting higher interest rates as compensation for risk—is now seen as having lost its luster due to defaults on investment-grade corporate bonds issued by companies such as JTBC and JR GLOBAL REIT.

All Three Major Credit Rating Agencies Report Defaults in Investment-Grade Bonds

According to the credit rating industry on the 5th, as of the first half of this year, all three major domestic credit rating agencies— Korea Ratings Corporation(034950), Korea Credit Rating Agency, and NICEHoldings—reported defaults in the investment-grade category (BBB or higher). The number of investment-grade defaults by agency was three for Han Ki-pyeong, two for Han Shin-pyeong, and two for NICEHoldings.

During the same period, there were zero defaults in the speculative-grade category (BB or lower) for both Korea Ratings and Korea Credit Rating. NICE Credit Rating also recorded only one default (DAWONSYS Co., LTD). This represents a complete reversal of the trend seen over the past four years (2022–2025), during which defaults occurred primarily among speculative-grade issuers. The default rating is based on the credit rating as of the end of the immediately preceding fiscal year, not the date of default.

This “reversal in default rates” is fueling deep mistrust in credit ratings themselves. This is because the shock felt by the market was much greater when companies at the very edge of investment grade—which were previously considered safe—suddenly defaulted without any prior warning signs or a gradual series of downgrades.

Typically, credit ratings decline gradually as financial conditions deteriorate, giving investors time to gauge the risk of default. This is why “surprise defaults” like those seen this year are cited as a factor that not only fuels fears about the deterioration of corporate financial soundness but also amplifies the “hidden risks” in the non-investment-grade bond market.

Speculative-Grade Risks Also Unpredictable

The market does not take the statistic that the default rate for speculative-grade bonds is “0” at face value. Since distrust has taken root that credit ratings do not function as early warning signals for default risk, even a low default rate is difficult to view as evidence that risk has decreased. Instead, there is a growing sense of caution that hidden financial weaknesses may surface belatedly after a time lag.

This is also evident in the interest rate benchmarks for non-investment-grade bonds. As of the 4th, the yield on 3-year BBB-rated corporate bonds stood at 10.23% per annum, remaining in double digits. Yields on BBB- and BBB+-rated bonds are currently at 8.86% and 7.80% per annum, respectively. From the companies’ perspective, the burden of financing costs is excessively high, and from the investors’ perspective, skepticism is widespread that high interest rates of around 10% do not fully compensate for the risk of default (risk premium), leading to a situation where investors are shying away from purchases.

An official from a credit rating agency pointed out, “It is extremely rare for the number of investment-grade defaults to exceed that of speculative-grade defaults,” adding, “In a situation where even investment-grade ratings are collapsing, investors find it difficult to place their trust in speculative-grade bonds because they cannot assess the risks involved at all.”

The official continued, “Investment-grade defaults occurring amid a general contraction in the corporate bond market will further fuel the aversion to non-investment-grade bonds,” adding, “This will inevitably create a vicious cycle that worsens funding conditions for non-investment-grade companies and further increases their risk of default.”

“HANJIN Logistics Corporation and DONGWHA ENTERPRISE CO., LTD. Also Failed to Sell All Bonds”… Recovery of Sub-Investment-Grade Bonds Unlikely for the Time Being

Given this situation, while investor sentiment in the corporate bond market as a whole is likely to improve, the prevailing view is that this positive trend is unlikely to extend to sub-investment-grade bonds. Observers predict that the aversion to sub-investment-grade bonds will persist as long as it remains difficult to gauge the actual risk of default.

A credit analyst at a securities firm said, “Just looking at the recent unsold bonds from HANJIN Logistics Corporation and DONGWHA ENTERPRISE CO., LTD. during their book-building periods clearly illustrates the cool investor sentiment toward non-investment-grade bonds,” adding, “Given their non-investment-grade status, issuers must offer attractive yields to offset the risk, but considering expected returns amid recent stock market volatility, current yields are insufficient to attract investors.”

He continued, “The corporate bond market has a tendency for the repercussions of a single event to linger for quite some time,” adding, “Given that credit issues have been continuously surfacing recently—following last year’s Homeplus crisis—a recovery in the non-investment-grade corporate bond market does not appear likely for the time being.”