CP and Electronic Short-Term Bonds Swell to 352 Trillion Won... U.S. Rate Hikes Put Refinancing of 'Short-Term Money' on Alert [FN Market Watch]

[Financial News] The outstanding balance of short-term instruments held by companies and financial institutions has grown to 352 trillion won. As funding through commercial paper (CP), electronic short-term bonds and bank loans has increased in place of long-term corporate bonds, concerns are mounting that repeated refinancing of short-maturity funding could become more burdensome as the Bank of Korea (BOK) and the U.S. Federal Reserve System (Fed) raise interest rates.
According to the financial investment industry on the 20th, the outstanding balance of CP and electronic short-term bonds, including short-term asset-backed securities, totaled 352.3603 trillion won as of the 18th. That was an increase of 110.2910 trillion won, or 45.6%, from 242.0693 trillion won at the end of 2020.
CP, including asset-backed commercial paper (ABCP), increased 30.8% over the same period, from 193.2024 trillion won to 252.7003 trillion won. Electronic short-term bonds, including asset-backed short-term bonds (ABSTB), surged 103.9% from 48.8669 trillion won to 99.6600 trillion won, more than doubling.
The center of gravity in corporate financing is also shifting from long-term to short-term funding. According to NICE Investors Service, public offerings of stocks and corporate bonds fell 15.6% year on year in the first half of this year, while CP and electronic short-term bond issuance jumped 68.0% to 1,272.8000 trillion won.
The same trend is evident among general companies. From January through July this year, companies made net repayments of 16.2000 trillion won in corporate bonds, while bank loans amounted to 57.2000 trillion won and funding through CP and electronic short-term bonds totaled 12.1000 trillion won. Relatively short-term funding has filled the gap left by long-term corporate bonds.
The widening gap between short- and long-term interest rates is one factor behind the shift. This month, the rate on 91-day A1-rated CP stood at 3.26% as of the 18th, while the rate on three-year AA- corporate bonds was 4.706%, creating a gap of about 144 basis points. Rather than lock in high long-term rates, companies now have a greater incentive to raise funds through short-term instruments first and switch to longer-term funding once rates stabilize.
The problem arises if high interest rates persist. With the yield on 10-year U.S. Treasury securities exceeding 5%, the domestic bond market is also under upward pressure on interest rates. Because CP and electronic short-term bonds have short maturities, higher funding costs are quickly reflected each time they are rolled over. Companies that use short-term instruments even for investments with long payback periods, such as capital expenditures or mergers and acquisitions (M&A), may have no choice but to rely on repeated refinancing the longer it takes them to return to the corporate bond market.
Kim Ga-young, head of the Evaluation Criteria Office at NICE Investors Service's Evaluation Policy Division, noted, "More important than the rise in the share of short-term funding itself is whether companies can switch back to long-term funding when necessary. For companies whose access to long-term markets and banks' capacity to provide alternative funding have both weakened, a shift toward short-term funding could signal growing refinancing risk."
The burden is particularly heavy for lower-rated companies. In the second quarter of this year, AA-rated and higher bonds accounted for 84.5% of total unsecured corporate bond issuance, while A-rated bonds accounted for 13.4% and BBB-rated or lower bonds just 2.1%. As of the end of June this year, short-term borrowings accounted for 100% of total borrowings at BBB-rated companies, up sharply from 65.9% a year earlier. This means companies with more limited access to the long-term corporate bond market may be exposed more quickly to rising interest rates and disruptions in the refinancing market.
The sharp increase in securities firms' short-term funding is another variable. Kim Ga-young said, "The outstanding balance of CP and electronic short-term bonds at the nine largest securities firms rose 97.1% in just six months, from 38.9000 trillion won at the end of last year to 76.7000 trillion won at the end of June this year." The increase reflects greater funding to support the expansion of short-term operating assets, including margin lending, trading margin and settlement funds, amid a booming stock market.
If the market becomes strained, liquidity pressures at securities firms could spill over into the corporate funding market. To secure cash, securities firms may reduce their purchases and underwriting of corporate bonds and CP, their holdings of bond inventories, and their extensions of corporate credit. This could narrow companies' access to market-based funding.
Kim said, "In the event of a market shock, the possibility that liquidity pressures at securities firms will translate into poorer funding conditions for general companies through reduced market intermediation and risk-taking capacity has increased compared with the past."
[email protected] Kim Hyun-jung Reporter