Fluctuations in credit spreads serve as an indicator of investor sentiment and capital flows in the corporate bond market. “Credit Signal” provides an intuitive analysis of overall market trends and context, focusing on weekly changes in spread trends. <Editor’s Note>

[Edaily Marketin Reporter LEE GEON-EOM ] Commercial paper (CP) rates have continued their upward trend, approaching their highest levels of the year. While the burden of long-term corporate bond issuance costs remains, demand is flooding into the short-term money market, causing funding costs to rise as well.

According to the Bond Information Center of the Korea Financial Investment Association on the 12th, the yield on 91-day commercial paper stood at 3.24% as of the 10th. Having remained in the 3.15% range until mid-August, the CP yield jumped to 3.21% on the 27th of last month—the day the benchmark interest rate was raised. After fluctuating in the 3.22% range, rates began rising again this month, reaching 3.23% on the 9th and 3.24% on the 10th.

This marks the highest level in about eight months, since early January when the rate stood at 3.27%. This development can be interpreted as a sign that the short-term refinancing burden is growing for companies that have been relying on rollovers (maturity extensions) to stay afloat.

However, some analysts argue that it is difficult to conclude that companies’ short-term funding strategies have reached their limits based solely on the rise in CP rates. This is because, even as the cost of issuing long-term corporate bonds remains burdensome, companies are adjusting their funding structures toward bank loans rather than relying exclusively on the short-term market, such as CPs.

According to the report titled “Private Sector Deleveraging, Public Sector Releveraging” published by Hana Securities on the 9th, the combined total debt of 245 investment-grade non-financial corporate bond issuers (excluding SK Hynix) stood at 1,382 trillion won as of the end of the first half of this year, an increase of approximately 97 trillion won from the end of last year. Of this amount, the increase in market-based borrowing was limited, and most of the rise in debt came from general loans, primarily bank loans.

Financial indicators also improved. Compared to the end of the first quarter of last year, the combined debt-to-equity ratio fell from 153% to 142%, and the net debt dependency ratio dropped from 24% to 22%. The share of corporate bonds in total debt also fell from 23% at the end of the first half of 2021 to 14% at the end of the first half of this year.

Kim Sang-man, Executive Vice President at Hana Securities, explained, “While short-term financing might have been the more advantageous option purely from an interest rate perspective, companies actively utilized relatively stable loans from the financial sector.” He added, “We believe it is safe to set aside concerns about the deepening of short-term financing structures, which had been a source of worry in some market circles.”

Meanwhile, spreads on high-quality corporate bonds rated AA- or higher are narrowing. The spread on a 3-year ‘AA-’ rated corporate bond stood at 67.0 basis points (1 bp = 0.01 percentage point) on the same day. Compared to 72.3 bp on the 5th of last month, it has narrowed by 5.3 bp over the past month.

A credit spread refers to the difference between the yield on government bonds—which are considered safe assets—and the yield on corporate bonds issued by individual companies. Since companies face a higher risk of default than the government, they must pay an additional interest rate when raising funds; this difference is the credit spread. In other words, a narrowing credit spread indicates that market sentiment has improved, leading to correspondingly better funding conditions for companies.

However, the prevailing view in the market is that it is difficult to attribute the narrowing of the spread solely to an improvement in corporate fundamentals. Analysts suggest that while companies are not actively increasing the supply of corporate bonds due to the burden of high absolute interest rates, demand from institutional investors seeking high yields is concentrated on high-quality bonds, thereby supporting the decline in spreads.

The marginalization of non-investment-grade bonds has become even more pronounced. The yield on a 3-year BBB- rated bond stood at 10.405% on the same day, remaining in double digits.