Plenty of money in the market, but companies are struggling... "Arteriosclerosis" where corporate bonds and donations are blocked

The Bank of Korea's public data for the broad money supply (M2) balance in May showed a total of 4,184 trillion won, an increase of approximately 32 trillion won from the previous month. This marks the seventh consecutive month of growth since November last year, indicating that liquidity in the market has increased.

However, the money multiplier, which indicates the ratio of M2 to base money (M0), has declined from an annual average of 14.9 times in 2024 to 13.36 times as of May. This reflects a situation where while the flow of money has increased, its impact on the real economy is not commensurately large. In fact, companies, including listed firms, are reporting tight liquidity conditions. The use of rights offerings (paid-in capital increases), which serve as the last line of defense, has become more difficult due to stricter thresholds set by financial authorities, deepening the concerns for businesses.

On the 5th, the Financial Supervisory Service requested a correction to SK D&N's securities registration statement regarding its decision at last month's board meeting on the 28th to proceed with a rights offering (paid-in capital increase) of 136.7 billion won through allocation to shareholders. On the 31st, submissions of securities registration statements related to rights offerings (paid-in capital increases) were simultaneously requested for three KOSDAQ-listed companies: Hanul Semiconductor, Edge Foundry, and Sangji Construction.

Hanwha Solution, which attempted a donation of 2.4 trillion won, reduced the amount to around 1.7 trillion won after receiving two correction requests in April this year. EcoPro BM, which applied for capital increase worth 1.2 trillion won for new investment purposes, also received a request to correct its securities registration statement, halting its fundraising efforts.

Since the beginning of this year, there have been 15 cases where rights offering (paid-in capital increase) plans were delayed or scaled down due to intervention by financial authorities. Not only this year but also last year, SamsungSDI was able to raise funds only after several corrective filings.

As the financial authorities raise hurdles that effectively resemble a licensing system, the scale of new stock issuance has recently been trending downward. According to data released by the Korea Depository & Clearing Corporation at the end of last month, the total amount of new stock issuances in the first half of this year was 6.2722 trillion won, down 24.5% compared to 8.3103 trillion won in the same period last year. Compared to the 17.58 trillion won issued in the second half of last year, this represents a drop of as much as one-third.

A capital market industry official pointed out, "Unlike recent equity transfers that previously focused on executives and major shareholders, many now clearly specify purposes such as capital increases and enhancement of shareholder value." The official added, "The policy direction is moving toward excessive control over capital raising, which should be left to the autonomy of companies and investors."

Even as the threshold has risen, companies are choosing private placements as a funding method due to a frozen issuance market. The preferred funding methods for companies (excluding bank loans) follow the order of "corporate bonds → mezzanine (bonds convertible into equity) → private placement."

According to the Financial Supervisory Service, corporate bond issuance in the first half of this year totaled 123.5968 trillion won, a 15.2 percent decrease from the same period last year. General corporate bonds fell by 31.5 percent to 25.9052 trillion won, financial bonds decreased by 7.2 percent to 90.4157 trillion won, and asset-backed securities (ABS) dropped by 30.6 percent to 7.2759 trillion won.

The decline in corporate bond issuance is attributed to factors including rising market interest rates, a contraction in investor sentiment toward electronic short-term bonds (short-term commercial paper), pressure from financial authorities on mezzanine financing, and market disruption caused by leveraged ETFs. In March, the yield on AA-rated three-year corporate bonds surged by 0.132 percentage points (p.p.) in a single day amid rising international oil prices due to the war between the United States and Iran, alongside concerns over inflation. During the same period, the yield on three-year government bonds rose from an annual rate of 2.953% at the end of last year to 3.959% by the end of July, while the yield on AA-rated three-year corporate bonds increased from 3.476% to 4.653%.

The market for short-term commercial paper has also frozen. Commercial paper with maturities of less than a year often offers high yields, as they typically carry credit ratings just above speculative grade (the lowest tier of investment grade). Asset management companies have historically included such instruments as underlying assets in high-yield funds to boost returns. However, following default incidents involving JR Global REIT and JTBC this year, the number of companies seeking such unstable bonds has declined.

The mezzanine market has also gone quiet. As authorities stepped up pressure amid controversy that companies were exploiting exchangeable bonds (EBs) as a "loophole" to avoid retiring their own shares under the third revision of the Commercial Act, the market came to a standstill. A representative case was Kwangdong Pharmaceutical's withdrawal of its EB issuance at the end of last year. The Financial Supervisory Service also issued a correction order against iToxi's convertible bonds (CBs), citing potential violations of the re-pricing rules for conversion prices.

Amid this, the single-stock leverage ETFs for Samsung Electronics and SK Hynix appear to have disrupted the corporate bond market by encouraging the issuance of securities bonds. Securities firms, acting as LPs (institutional investors), are required to post massive margins when the prices of leverage ETFs plummet. In doing so, they absorbed market funds by utilizing corporate bonds. Last month, Kiwoom Securities issued 400 billion won in corporate bonds, Samsung Securities issued 600 billion won, and Mirae Asset Securities issued 1.32 trillion won in commercial paper (CP).

A debt capital market (DCM) official said, "The Lego Land incident has made it difficult to meet the interest rates promised to customers due to regulations and pressure," adding, "Companies that were expected to be stable this year have entered restructuring procedures, leading to a vicious cycle where transactions were lost and interest rates rose."

Behind the industry's complaints about the difficulty of raising funds lies a recent surge in corrective requests for securities registration statements by the Financial Supervisory Service. While ordinary shareholders welcome the move, companies with narrowed operational flexibility express concern over heightened management uncertainty.

On the 7th, Money Today's aggregation based on electronic disclosures from the Financial Supervisory Service and submission materials by People Power Party lawmaker Kim Sang-hoon revealed that correction requests for securities registration statements this year reached 66 as of that day. This level surpasses the annual figures of last year (43 cases) and 2024 (56 cases) within eight months.

Looking at individual companies, there have been repeated cases of correction requests. Since the beginning of this year, Hanul Semiconductor and Sangji Construction have faced rejection four times each, while Agent AI and Hyurim Aitech have each been rejected three times.

The authorities' request for correction has the effect of suspending the validity of the securities registration statement. Listed companies may also face the burden of sharp stock price fluctuations. For this reason, it is reported that there have been numerous cases at corporate sites where companies corrected their registration statements after engaging in practical consultations or detecting an "implicit gesture" from the Financial Supervisory Service before it launched a formal request.

The scope of correction requests is expanding from traditional conflict issues such as rights offerings (paid-in capital increases) to mergers and splits. While only one listed company received a correction request regarding comprehensive stock exchange, the number has increased to four this year: Hyundai G&F Holdings, E-Mart, Netmarble, and Woori Financial Group.

The surge in scrutiny over "needle-point" investigations is rooted in last year's revision of the Commercial Act. Industry observers note that as the scope of directors' duty of loyalty under the Commercial Act expanded from being limited to "the company's interests" to include "the interests of both the company and its shareholders," the authorities' discretionary power has also been strengthened.

There are also claims that political considerations were incorporated, as the capital market operation was aligned with a policy focused on protecting the rights of ordinary shareholders. Typically, the Financial Supervisory Service does not disclose reasons for individual correction requests.

Evaluations regarding the shift in regulatory stance are sharply divided. On one side, ordinary shareholders sensitive to short-term negative factors such as share dilution praise the authorities for tightening their standards, arguing that shareholder rights have been enhanced. On the other hand, major shareholders and corporate representatives express concern that predictability has plummeted regarding capital raising through share dilution or corporate mergers and divisions. Critics warn that regulatory intervention could exacerbate management issues.

A financial investment industry official stated, "When a correction request is received once, the schedule is inevitably delayed by at least several weeks. For companies that attempted to pledge shares due to urgent needs for repaying borrowings or securing operating funds, this can lead to a liquidity crisis." The official added, "Even if the funding gap caused by the filing correction is resolved through additional short-term borrowing, the company must still bear increased medium- to long-term financial burdens."

Outside and inside the stock market, there are also opinions that if review criteria are subdivided and clarified according to business conditions and corporate governance for capital increases, which is the main trigger for correction requests, predictability can be enhanced, thereby alleviating conflicts between shareholders and companies. In the market, there is a trend where stock price volatility differs depending on the type of capital increase.

Hong Ji-yeon, senior researcher at the Korea Capital Market Institute, stated that "public offerings and general public placements are perceived as signals of the need for external funding and overvalued stock prices, leading to negative short-term market reactions, whereas private placements to third parties tend to be interpreted as positive signals regarding strategic investor participation and corporate valuation." She added, "An analysis of cumulative abnormal returns (CAR) following disclosures by listed companies that conducted public offerings between 2020 and 2022 reveals clear differences depending on the issuance method."

While our economy has recorded record-high export performance and a current account surplus, businesses are finding financing conditions increasingly difficult. Excluding some semiconductor-centric industries, overall economic uncertainty is growing, and companies are reporting challenges across all direct and indirect financial sectors.

According to industry sources on the 10th, companies are facing difficulties in various funding methods, including bank loans, corporate bond issuance, and stock offerings.

This is also revealed in the "Survey on Corporate Fundraising Status and Policy Tasks" conducted recently by the Korea Chamber of Commerce and Industry (KCCI) targeting 204 non-financial companies. Responding companies cited "borrowing from commercial banks" (43.6%) as the most difficult fundraising method over the past year. They also identified "loan interest burden due to high interest rates" (48.5%) as the biggest immediate problem.

The corporate interest burden is expected to increase further following the Bank of Korea's base rate hike last month. Since interest rates are tied to macroeconomic conditions and cannot be lowered immediately, companies urgently identified "expanding corporate lending through risk-weighted asset relief" (52.5%) as a top policy priority. Reducing risk weights lowers banks' capital accumulation burdens relative to potential loan losses, thereby increasing their capacity to lend.

As lending thresholds in the financial sector rise, direct financing as another alternative is flowing primarily into short-term funds.

According to the Financial Supervisory Service, the total amount of public offerings of corporate stocks and bonds in the first half of this year was 126.5754 trillion won, a decrease of 23.3570 trillion won (15.6%) compared to the same period last year. Among these, stock issuance dropped by 1.2551 trillion won, plummeting 29.6%. Corporate bond issuance fell by 15.2%. The decline is attributed to increased market uncertainty, which has worsened conditions for long-term funding.

On the other hand, commercial paper (CP) and short-term corporate bonds surged sharply. From January to June this year, issuance totaled 1272 trillion 848.3 billion won, an increase of 515 trillion 106.9 billion won (68%) compared to the same period last year.

An industry insider stated, "While securities firms are indeed mobilizing funds to meet the so-called 'margin investing (investing with debt)' demand, there is also a fundamental aspect where companies prioritize solving immediate operational funding needs or rolling over existing debts rather than establishing and operating long-term, stable financial plans."

Even as stock prices surged sharply, there was little positive impact on capital raising. Although the Korea Chamber of Commerce and Industry survey was conducted in May and June while the KOSPI was climbing toward an all-time high, only 14.7 percent of respondents answered that conditions for capital raising had improved through new share issuance and other measures related to the stock price increase.

Choi Eun-rak of the Korea Chamber of Commerce and Industry Jo Sa-bon (Director) stated, "Whether companies can secure funding at the time they need it through smooth corporate finance operations is a more important issue than the amount of liquidity in the market," adding that "corporate finance should not be a system where bank loans, corporate bonds, and stock issuance operate separately, but rather a structure that complements one another, creating an environment where companies can utilize various funding methods according to their circumstances."