🚨 Low-Credit Companies Face Funding Crisis: Corporate Bond Market Frozen Despite Interest Rate Cuts

Today Korean Economic News | 2025.05.27

📌 Low-Credit Companies Hit Red Light in Funding Despite Rate Cuts, Homeplus Shock Spreads Investor Anxiety

💬 Despite recent interest rate cuts, companies with low credit ratings are finding it much harder to issue corporate bonds. After Homeplus applied for court receivership, investor anxiety has grown, causing the non-investment grade corporate bond market to freeze up. As a result, low-credit companies are trying to raise money through high-interest private bonds or asset sales, but concerns about liquidity crisis are increasing. Financial authorities are worried about the negative effects that the sharp contraction of the non-investment grade bond market might have on the real economy and are preparing countermeasures.

1️⃣ Easy to Understand

Even though interest rates have gone down, companies with low credit scores are having an even harder time borrowing money. Just like individuals with low credit scores find it difficult to get loans, companies are facing the same situation.

First, let me explain what a 'corporate bond' is in simple terms. A corporate bond is like an IOU that companies issue to borrow money. Just like individuals get loans from banks, companies borrow money from investors by promising to pay back the money with interest later. When a company has a high credit rating, it can borrow money at low interest rates. When a company has a low credit rating, it has to pay higher interest rates.

Recently, the Bank of Korea lowered interest rates. Usually when interest rates go down, it becomes easier for companies to borrow money. But right now, the opposite is happening. Companies with low credit ratings are finding it even harder to borrow money.

The biggest shock came from Homeplus filing for court receivership. Homeplus is a familiar large retail company to us, and when this company faced bankruptcy crisis, investors were greatly surprised. The thought "even such a big company can fail" spread, making investors reluctant to invest in risky corporate bonds.

As a result, companies with low credit ratings found it nearly impossible to issue corporate bonds. It's like how banks make loan screening stricter when the economy gets tough. Investors started thinking "let's only invest in safe places."

So how do these companies get money? First, they issue something called private bonds. These are bonds sold only to specific investors, not general investors, and the interest rates are much higher. Second, they sell company buildings or land to create cash. Third, they get secured loans from banks. But all these methods either cost a lot or result in reducing company assets.

In the end, when companies with low credit ratings find it hard to get money, the office workers at these companies and related businesses can also face difficulties. Changes in financial markets can directly affect our daily lives.

2️⃣ Economic Terms

📕 Corporate Bonds

Corporate bonds are debt securities issued by companies to raise funds, promising to pay back the principal and interest to investors after a certain period.

• Unlike bank loans, companies can raise funds from many different investors.
• Interest rates are determined by the company's credit rating - lower credit ratings mean higher interest payments.
• Unlike stocks, bonds have maturity dates and pay fixed interest, making them relatively stable investments.

📕 Credit Rating

Credit rating is a grade that evaluates a company's or individual's ability to repay debt, showing the risk level of investment or loans.

• Ratings range from AAA (highest quality) to D (default), with higher ratings seen as safer investments.
• In Korea, Korea Ratings, NICE Investors Service, and KIS Rating evaluate credit ratings.
• BBB- and above are called 'investment grade', while below that are called 'speculative grade' or 'junk bonds'.

📕 Private Bonds

Private bonds are corporate bonds sold only to a small number of specific investors, not to the general public.

• The issuance process is simpler and faster than public bonds, but interest rates are generally higher.
• Mainly purchased by institutional investors or professional investors, with low liquidity making mid-term trading difficult.
• Often used as a last resort for funding by companies with low credit ratings.

📕 Liquidity Crisis

Liquidity crisis occurs when a company has assets but lacks immediately available cash.

• Happens when sales exist but cash collection is delayed, or when assets exist but are hard to convert to cash.
• Creates difficulties in repaying short-term debt or securing operating funds, causing major damage to management.
• In severe cases, can lead to profitable bankruptcy (making profit but going bankrupt due to lack of cash).

3️⃣ Principles and Economic Outlook

✅ Homeplus Shock and Changes in Investment Sentiment

• Let's analyze the impact of Homeplus's court receivership application on the corporate bond market.

  • First, the collapse of a major retail company shocked investors more than expected. Homeplus was once the second-largest discount store chain in Korea with annual sales of 6 trillion won. Even after being sold by UK's Tesco to MBK Partners in 2014, it was still perceived as a stable company. However, the spread of online shopping, changes in consumption patterns after COVID-19, and excessive debt worked together to eventually lead to court receivership application. Particularly, Homeplus had issued corporate bonds worth about 1.2 trillion won, raising concerns about investor losses. This event planted the idea that "even large companies can be risky anytime," greatly increasing investors' risk-averse tendencies.

  • Second, investors' credit selection standards became much stricter. In the past, BBB-grade corporate bonds had some demand, but after the Homeplus incident, investors began preferring only A-grade or higher corporate bonds. Individual investors' corporate bond investments dropped sharply, as they moved their money to safer bank deposits or government bonds rather than taking risks. Institutional investors did the same. Insurance companies and pension funds greatly reduced their investments in low-credit corporate bonds, causing demand to plummet. For companies with low credit ratings, this is essentially like having their funding channels blocked.

  • Third, distrust of the entire retail industry is spreading. The Homeplus incident revealed not just one company's problem but structural issues across the entire retail industry. The rapid growth of online shopping is worsening the profitability of offline stores, and high rent and labor costs continue to burden businesses. Investors began judging that other companies in similar industries are also exposed to risks like Homeplus. In fact, corporate bonds of other retailers like Lotte Shopping and Shinsegae are seeing interest rate increases and facing difficulties in new issuances.

• The Homeplus incident is serving as a watershed moment that changes the credit evaluation standards of Korea's entire corporate bond market, beyond just an individual company crisis.

✅ Funding Alternatives for Low-Credit Companies and Their Limitations

• Let's look at the alternatives available to low-credit companies that find it difficult to issue corporate bonds and their limitations.

  • First, private bond issuance is a major alternative but the high cost is burdensome. Companies that find it difficult to issue public corporate bonds are turning to the private bond market. Private bonds have simpler issuance procedures and relatively fewer credit rating restrictions, but interest rates are 1-3 percentage points higher than public bonds. For example, if a BBB-grade company could raise funds at 4% interest through public bonds, it would have to pay 6-7% interest for private bonds. This greatly increases the company's interest burden and worsens profitability. Also, private bonds have limited buyers, so there are constraints on large-scale funding. Many companies can only raise part of their needed funds through private bonds and must find other methods for the rest.

  • Second, cash acquisition through asset sales is increasing but there are concerns about long-term competitiveness damage. Companies facing funding difficulties are selling their real estate holdings or subsidiary stakes to secure cash. This has the advantage of getting immediate cash, but it means giving up future revenue sources, which could lead to decreased corporate value in the long term. Especially, selling well-located real estate makes it difficult to repurchase later, and selling key subsidiaries reduces the business portfolio. However, for companies facing immediate liquidity crisis, this is often an unavoidable choice. Some companies are using funds from asset sales primarily for debt repayment, so the actual effect of securing operating funds is limited.

  • Third, attempts to expand bank loans face obstacles of insufficient collateral and strict screening. Companies that find corporate bond issuance difficult are turning to bank loans, but they face difficulties here too. Banks are also strengthening loan screening due to economic recession concerns, demanding strict conditions from companies with low credit ratings. They particularly require collateral like real estate or machinery, but many companies find it difficult to provide additional collateral as existing assets are already used as collateral for previous loans. Also, bank loan interest rates are often higher than corporate bonds, creating significant cost burden. Some companies try to get loans with guarantees from guarantee agencies, but additional costs like guarantee fees occur, raising overall funding costs.

• All funding alternatives for low-credit companies come with higher costs or constraints than before, adding to companies' financial burden.

✅ Economic Ripple Effects of Non-Investment Grade Bond Market Contraction

• Let's analyze the ripple effects that the freezing of the non-investment grade corporate bond market might have on the real economy.

  • First, there are concerns that investment contraction by small and medium enterprises could weaken economic growth momentum. When low-credit companies find funding difficult, their capital investments and R&D investments inevitably decrease. Medium-sized companies in early growth stages are expected to be particularly hard hit. These companies often don't have high credit ratings yet but have great future growth potential, and funding difficulties could cause them to miss growth opportunities. If investments by medium-sized companies that play the backbone role in Korea's economy decrease, the entire economy's innovation capacity and growth potential could weaken. According to a survey by the Korea Federation of SMEs, small and medium enterprises' investment plans have been significantly reduced recently.

  • Second, it's likely to negatively affect the job market. Companies facing funding difficulties may reduce hiring or lay off existing employees to cut costs. Particularly, as small and medium enterprises in manufacturing and service industries provide many jobs, difficulties for these companies could negatively impact the entire job market. Also, if new business or expansion investments decrease, creating new jobs becomes difficult. This is expected to particularly negatively affect youth and experienced worker employment. Rising unemployment and income reduction could lead to consumption contraction again, creating a vicious cycle throughout the economy.

  • Third, it could become a risk factor for financial system stability. As low-credit companies turn to bank loans instead of corporate bonds, banks' credit risk could increase. If banks worry about this and make loan screening even stricter, a 'credit crunch' phenomenon could appear. There's also risk that some low-credit companies might be pushed into high-interest private bonds or private lending markets, bearing excessive interest burdens. This could lead to failures of these companies, causing losses to the entire financial system. Particularly, if chain failures occur in highly interconnected industries, there's a possibility it could spread as systemic risk.

• The malfunction of the non-investment grade corporate bond market could cause structural problems in Korea's financial ecosystem, requiring active responses from the government and financial authorities.

4️⃣ In Conclusion

The phenomenon of low-credit companies finding it difficult to raise funds despite interest rate cuts is emerging as a new risk factor for Korea's economy. The investor anxiety triggered by Homeplus's court receivership application is bringing structural changes to financial markets beyond just a temporary phenomenon.

The core of this problem is the 'credit polarization' phenomenon. While companies with high credit ratings can easily raise funds at low interest rates, companies with low credit ratings are facing situations where their funding channels are completely blocked. This can harm the efficiency of the market economy and weaken the overall economy's growth momentum.

What's particularly concerning is the ripple effects this phenomenon might have on the real economy. Companies facing funding difficulties have no choice but to reduce investments and cut employment. This could lead to decreased economic growth rates and increased unemployment, directly affecting all our lives.

However, this crisis is also an opportunity for Korea's financial market to develop in a healthier and more efficient way. The increased awareness of credit risk among investors could serve as a catalyst for reducing past reckless investments and creating a more careful investment culture.

The government and financial authorities need sophisticated policies that can prevent excessive credit contraction without harming market functions. At the same time, companies should put more effort into securing long-term financial soundness rather than short-term funding.

Ultimately, this incident teaches us that all economic actors need to engage in more careful and responsible economic activities. This is a time when wise responses that can turn crisis into opportunity are needed.