SEOUL, June 10 (Korea Bizwire) – South Korean investors are piling into high-yield corporate bonds with relatively high risk in search of bigger returns as the country’s interest rates are at rock bottom, sources said Friday.
Trading of these so-called mezzanine bonds have recently been active as investors are drawn to debt that offers a higher rate of return, but is riskier because of its lower status in the capital structure.
The trend comes as financially troubled companies, which find it difficult to float bonds through public sales, are also rushing to sell such bonds in a desperate bid to raise much-needed cash, they said.
Mezzanine bonds include convertible bonds (CBs) that can be converted into a predetermined amount of a company’s equity at certain times during their life; bonds with warrants (BWs) that offer holders a chance to buy shares in the issuing company at a guaranteed price; and exchangeable bonds (EBs) that give the holder the option to exchange them for shares of a subsidiary or other company at some future date and under prescribed conditions.
According to the sources, demand for detachable BWs issued by South Korea’s top two container carriers — Hanjin Shipping Co. and Hyundai Merchant Marine Co. — has been rising recently, pushing their prices up sharply.
Detachable BWs allow the holder to sell the right to buy shares in the secondary market separately. Holders can exercise the right to earn a profit when the issuing company’s share price rises.
Doosan Engineering and Construction Co. with a below-investment-grade rating of BB plus is also drawing investor attention after announcing a plan to issue 150 billion won (US$129 million) worth of detachable BWs.
Local investors are also rushing to purchase CBs and EBs in search of higher returns amid a dearth of decent investment vehicles, the sources said.
“An increasing number of investors are becoming interested in mezzanine bonds to earn higher returns amid a prolonged period of low interest rates,” said an analyst at NH Investment & Securities Co.
In an unexpected move, the Bank of Korea cut its key interest rate by a quarter percentage point to a record low of 1.25 percent a day earlier, the first rate reduction in 12 months which is widely seen as aiming to prop up the sputtering economy amid an extensive corporate restructuring drive.