Securities firms in South Korea issued corporate bonds this month as the broader corporate bond market remained largely frozen, with only 7 companies issuing bonds compared to 25 companies that submitted securities reports for issuance a year ago. The securities firms' bond issuance is driven by surging margin requirements for leveraged exchange-traded funds (ETFs) tracking Samsung Electronics and SK Hynix, as liquidity providers must maintain cash collateral for daily settlement of stock futures used to replicate the ETFs' 2x leverage structure. The corporate bond market has contracted due to elevated borrowing costs from the Bank of Korea's interest rate increases and reduced demand for non-investment-grade bonds following the Jungwon Group liquidity crisis.
Securities Firms Issue Corporate Bonds to Meet Margin Requirements
Of the 7 companies that issued corporate bonds this month, most were securities firms including Shinhan Investment Securities and Samsung Securities. Kiwoom Securities, which serves as a liquidity provider for leveraged ETFs, issued 400 billion won in corporate bonds today. Samsung Securities issued 600 billion won in corporate bonds on the 10th. Securities firms have shifted from commercial paper and electronic short-term bonds to longer-maturity corporate bonds to fund their operations. Market participants attribute this shift to the margin requirements associated with leveraged ETF products.
Leveraged ETF Margin Demands Drive Bond Issuance
Securities firms acting as liquidity providers for Samsung Electronics and SK Hynix single-stock leveraged ETFs must purchase stock futures in advance to implement the 2x tracking structure. These futures require daily cash settlement, and increased stock price volatility has expanded settlement amounts, requiring securities firms to continuously replenish margin deposits with the exchange. According to the Korea Exchange, margin requirements for securities and derivatives markets in Q1 reached 25.76 trillion won, an increase of approximately 15 trillion won year-over-year. The margin requirements for Q2, when the leveraged ETFs were listed, are expected to exceed this amount. The explosive growth in leveraged ETF trading volume has led securities firms to turn to longer-maturity corporate bonds as short-term funding instruments became insufficient.
Corporate Bond Market Faces Funding Squeeze
Bond industry participants note that the increased volume of securities firm bond issuance is absorbing funds that would otherwise flow to regular corporate borrowers, potentially constricting corporate funding channels. The securities firms' bonds have emerged as major investment destinations for money market funds and institutional capital, reducing funds available for regular corporate bonds. Corporate bond interest rates reached 4.59% as of today, near year-high levels. Total corporate bond issuance in H1 was 67.37 trillion won, a decrease of approximately 10% compared to the same period a year ago. Net issuance—new issuance minus maturity redemptions—reached its lowest level in 10 years since 2016, indicating that companies raised significantly less actual funding from the market. Bond industry sources stated that "July and August typically see low issuance, but the high interest rate environment and negative sentiment have made investors hesitant to purchase regular corporate bonds."
Recovery Timeline Uncertain
The bond market expects the issuance gap for regular companies to persist for the foreseeable future. The possibility of additional Bank of Korea interest rate increases makes interest rate declines unlikely, and concerns about increased government bond issuance ahead of next month's budget announcement are cited as factors constraining market interest rate declines. Some companies may postpone corporate bond issuance to next year. A bond industry source stated that "the market expects the corporate bond issuance market to recover around early next year, but if corporate bond issuance rates do not stabilize, the second half may remain quiet."
FAQ
Q: Why are securities firms issuing more corporate bonds while the overall corporate bond market is frozen?
A: Securities firms are issuing corporate bonds to meet increased margin requirements for leveraged ETFs tracking Samsung Electronics and SK Hynix. As liquidity providers, they must maintain cash collateral for daily settlement of stock futures, and the margin requirements in Q1 reached 25.76 trillion won, an increase of approximately 15 trillion won year-over-year.
Q: How has corporate bond issuance changed compared to a year ago?
A: Only 7 companies issued corporate bonds this month, mostly securities firms, compared to 25 companies that submitted securities reports for bond issuance a year ago. Total H1 corporate bond issuance was 67.37 trillion won, a decrease of approximately 10% year-over-year, with net issuance at its lowest level in 10 years since 2016.
