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| Seoul's Yeouido financial district / gettyimagesbank |
Increase in mezzanine investments expected for next year
By Anna J. Park
Amid freezing market sentiment in most investment banking business areas, ranging from M&A deals and public offerings to real estate project financing, local securities firms are bracing to focus on recession-targeted growth strategies. Specifically, major securities companies plan to restructure their corporate and equity capital market departments, so as to respond nimbly to corporate clients' changed demands towards mezzanine financing, a hybrid of debt and equity financing.
According to local securities and investment banking industry insiders, securities companies are expecting next year's market environment to resemble those from 2009 to 2011, when unfavorable external macroeconomic exerted limitations on corporations' smooth cash flows. Under such restrained market sentiment, local securities companies aim to strengthen their roles in facilitating corporate clients' issuance of convertible bonds, exchange bonds and bonds with warrants.
These types of mezzanine financing help companies minimize negative market sentiment and risk factors for investors, as the bonds offer investors optional equities in addition to fixed-income corporate debt security. This would lower lenders' risks in the event of a default crisis, while companies could also attract capital at lower interest rates instead of just issuing corporate bonds.
Actually, the country's issuance market for bonds with warrants thrived for a couple of years from 2009 to 2011. For instance, Kia attracted 400 billion won ($302 million) by issuing bonds with warrants in 2009. LG Innotek also raised 50 billion through issuing convertible bonds and bonds with warrants simultaneously, followed by 300 billion won through issuance of convertible bonds in 2013.
Market insiders say there could be similar cases like this next year, as they expect increases in mezzanine financing for both conglomerates and smaller corporations. The recent jolt experienced in local corporate bonds markets also seems to be creating market conditions comparable to 2009; an A1-rated commercial paper's interest rate recently exceeded 5 percent for the first time since January 2009. With soaring interest rates, cash-strapped companies in need of capital injection choose mezzanine financing when they cannot afford to issue corporate bonds.
"While teams related to initial public offerings or real estate project financing are expected to face increased pressure of organization reduction and job cutbacks, mezzanine financing departments are currently examining whether to recruit more personnel in preparation for next year," a market insider said.
