SK hynix's 'KRW 60 Trillion Bond Buying'—Supporting the Market, but High Rates Are a Burden [fn Market Watch]

[Financial News] SK hynix is believed to have purchased around KRW 60 trillion worth of bonds in the domestic bond market this year. The company has emerged as a new major player in the market by investing the vast cash reserves generated by the semiconductor boom primarily in credit instruments, such as bonds issued by specialized credit finance companies and public enterprise bonds. However, if its bond investments are indeed worth tens of trillions of won as the market estimates, prolonged rate increases could make fluctuations in the valuation of its bond holdings a new burden for its fund management.
According to investment banking (IB) and bond-market sources on the 21st, the value of bonds SK hynix has purchased so far this year is estimated at around KRW 60 trillion. Credit instruments, including specialized credit finance company bonds and public enterprise bonds, are believed to account for most of the purchases, although Treasury bonds and bank bonds may also be included. However, SK hynix has not disclosed specific details about how it manages its funds, so the exact investment amount and portfolio composition remain unconfirmed.
SK hynix's entry into the market as a buyer was seen as providing some support for supply and demand in the credit market this year. Analysts said that with specialized credit finance company bonds and public enterprise bonds continuing to be issued, credit spreads could have widened somewhat further without SK hynix's buying pressure.
A bond-market source said, "The securities SK hynix mainly bought were specialized credit finance company bonds and public enterprise bonds. Had it not bought them at the time, credit spreads might have widened a little more."
In reality, this year's bond market saw yields driven higher by supply exceeding demand, rather than by a credit crunch. The global upward trend in interest rates has added to the pressure. The yield on the 10-year U.S. Treasury note surpassed the 5% mark. In South Korea, the Bank of Korea (BOK) raised its policy rate by 25 basis points from 2.75% to 3.00% last month, making the possibility of further hikes a major market variable.
The problem is that rising interest rates reduce the valuation of bonds already purchased. Bond yields and prices move in opposite directions. If SK hynix's actual bond holdings amount to tens of trillions of won, as the market estimates, even small rate movements could cause larger fluctuations in the valuation of its overall portfolio.
Against this backdrop, SK hynix temporarily halted its bond purchases early last month. Some in the IB industry interpreted the move as an effort to secure cash and cash equivalents ahead of large-scale shareholder returns. Bond-market analysts also said that managing the valuation of existing bond holdings amid rising interest rates has emerged as a key factor in fund management. If the investment totals tens of trillions of won, the decline in the overall portfolio's valuation could be larger even with the same degree of rate increase.
A bond-market source said, "It is difficult to conclude that SK hynix suddenly halted its bond purchases last month because of valuation losses, but the burden of continuing large-scale purchases as before could grow as interest rates rise." The source added, "Along with securing liquidity for shareholder returns, interest-rate volatility is also a factor that must be considered in the fund-management process."
An SK hynix official said, "As market interest in the company's recent fund management has increased, various theories have emerged." The official added, "However, it is difficult to disclose specific details regarding the company's fund-management activities."
[email protected] Kim Hyun-jung Reporter