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Can Lotte Food’s leveraging plan be litmus test for stimulus package?

South Korea’s food service firm Lotte Food saw a moderate success in raising cash through investment-grade corporate bonds, as a state fund has helped fend off risks from the escalating coronavirus crisis.

But analysts said Tuesday Korea is still a tough test bed to check whether the government’s stimulus package can normalize the funding market.

On Monday, Lotte Food decided to raise 100 billion won ($81.77 million) after it carried out an institutional investor tranche for its AA-graded three-year corporate bonds to refinance its existing debt, by working with Shinhan Investment, Samsung Securities and NH Investment & Securities.

The result came as the institutional tranche was oversubscribed, with “buy” offers amounting to some 140 billion won, triggering a change in its initial plan to raise 70 billion won.

Those who placed “buy” offers include the Korea Post and Mizuho Bank, as well as a state-organized “bond market stabilization fund,” which was created in March as part of the nation’s contingency relief package to prevent short-term funding market illiquidity.

The bond market stabilization fund solely offered to buy 30 billion won.

The news has given bond investors and borrowers a sigh of relief, given the market illiquidity seen in March in the wake of coronavirus pandemic.

Bond investors were spooked in March as power plant builder Pospower’s 50 billion won bond deal was met with institutional undersubcription on March 18. This was followed by undersubscriptions of Kiwoom Capital’s BBB+ rated instruments and Hana Bank’s AA graded 10-year subordinated bonds.

Since then, the corporate bond market has been through a respite until end-March.

In response, the government unveiled plans to create funds, including a flagship bond market stabilization fund with 3 trillion won ammunition as of current and up to 20 trillion won commitment to provide liquidity. Policy lender Korea Development Bank has allocated 1.7 trillion won cash to buy corporate bonds in case of undersubscription.

Market watchers are still questioning how the stimulus package plan will address the concerns about bearish signs in the funding market.

Following Lotte Food’s success, more companies will return to the corporate bond market to raise funds, including Hanwha Solution and Lotte Chilsung, in hopes of improving investor sentiment, according to Kim Sang-man, an analyst at Hana Financial Investment.

“As the corporate funding market has resumed, liquidity concerns are dying down, which is a positive sign,” wrote “However, the state fund will not offer a favorable interest rate in its bond buying offer, so it will take more time for the market to turn bullish.”

The deal will also be a litmus test for the central bank’s stance as to whether it would continue to pour in more money to stimulate the bond market.

The central bank is likely to implement more stimulus to normalize liquidity in the bond market, given the abnormal rate difference between the base rate and commercial paper yield, said Shin Dong-soo, an analyst at Eugene Investment & Securities.

“The state’s bond-buying fund is meant to prevent what is worse to come,” Shin told The Korea Herald. “State funds are buying more bonds but they fall short of narrowing down the credit spread. More measures by the central bank are needed to stabilize the market.”

He cited the credit spread -- or interest rate difference -- between policy rate and three-month commercial paper yield, which is currently five times higher compared to what is normal. The interest rate of commercial papers with 85-91 days of maturity peaked out at 2.230 percent on Thursday, according to the Korea Financial Investment Association.

Shin added that BOK’s direct loans to nonfinancial companies and direct purchase of commercial papers and corporate bonds are being planned, instead of indirect supply through the purchase of repurchase agreements.

By Son Ji-hyoung (