Korean companies are expected to sharply increase their bond issuance down the road as the government is putting the brakes on their local sales of debt denominated in foreign currencies, analysts said yesterday.

The government has determined to curb local companies’ issuance of so-called “kimchi bonds” in the domestic market, which are deemed as the main culprit for a surge in the country’s short-term foreign debt and the local currency’s ascent against the dollar.

Local financial authorities are looking into foreign bank branches’ handling of kimchi bonds, or foreign currency-denominated bonds, sold by local and foreign companies in the domestic market.

In light of the government’s tough stance on kimchi bonds, companies will have no choice but to resort more to the issuance of won-denominated debt sales, market watchers said.

“The government move will inevitably force companies to float won-denominated bonds or take out loans from banks,” said Hong Jeong-hye, an analyst at Shinyoung Securities Co.

Local companies’ debt sales are expected to rise by about 950 billion won ($875 million) per month as their kimchi bond issues for converting the proceeds into the local currency have reached a monthly average of $850 million, Hong predicted.

Companies typically issue kimchi bonds to raise dollars to settle their trade or repay foreign debts. According to local laws, they have to use the proceeds in foreign-currency transactions.

After selling the bonds, however, some debt issuers convert the dollars back into won through local branches of foreign banks in a bid to lower their overall borrowing costs, given that foreign-currency bonds are cheaper to sell than won-denominated ones.

In the first four months of this year, Korean public corporations, private companies and financial firms floated 4.5 trillion won in kimchi bonds, roughly 10 percent of total corporate debt sales worth 45.8 trillion won during the period.

Analysts also said corporate debt sales may surge over a short period of time as a large amount of corporate bonds are expected to come due by June. Corporate bonds worth around 10.3 trillion won will mature in May and June alone.

Currently, the Central Bank and the Financial Supervisory Service are conducting a joint inspection into foreign bank branches to check “expedient” sales of kimchi bonds by local companies. The financial authorities are set to revise related regulations after completing the inspection.

Korea has been ramping up efforts to cut volatility caused by excessive cross-border capital flows by tightening regulations on short-term foreign borrowing. To rein in excessive capital flows, Seoul will impose a levy on non-deposit foreign currency borrowings starting in August.


Yonhap