Loan Delinquency Rates Soaring... 'Interest Rates' Squeeze Corporate Finances

Three-Year AA- Corporate Bond Yield Up Since Start of Year
Corporate Bond Market Contracts... July Demand Forecast Down 29%
Corporate Loan Delinquency Rate Up 0.08 Percentage Points Year-on-Year... Financial Supervisory Service Warns of Possible Reb

As domestic corporate loan delinquency rates remain higher than one year ago, growing concerns have emerged that rising market interest rates could further squeeze companies’ liquidity. The increase in government bond yields both in Korea and abroad, combined with the Bank of Korea’s policy rate hikes, has caused corporate bond yields to surge, escalating both new funding and refinancing costs. If companies facing difficulties raising funds in the corporate bond market turn to bank loans, their financial burden rises, while vulnerable firms that are unable to secure loans may face liquidity pressures—potentially pushing future corporate loan delinquency rates up further.

Corporate Bond Yields Up 104.5bp Since Start of Year...Sharp Increase in Corporate Funding Costs

According to the Korea Financial Investment Association on August 21, the yield on three-year AA- rated unsecured corporate bonds stood at 4.504% per annum as of the 20th, up 0.7 basis points (bp) from the previous day (4.497%). Compared to 3.459% at the beginning of this year, the yield has jumped 104.5bp in just over seven months. This sharp rise indicates a substantial increase in the cost of raising funds through the corporate bond market. For instance, simply applying this market rate, a company raising 100 billion won would pay 3,459 million won in annual interest at a rate of 3.459%, but 4,504 million won at 4.504%. Even if the borrowed amount remains the same, the annual interest burden increases by 1,045 million won compared to the beginning of the year.

Given that AA- rated corporate bonds are issued by companies with relatively solid credit ratings, companies with lower credit grades face even greater funding burdens. Corporate bond yields are generally set by adding a credit spread, reflecting corporate credit risk, to government bond yields. If investors demand even higher risk premiums as government bond yields rise, corporate funding costs could jump further.

Representatives of economic institutions attending the 'Market Situation Review Meeting' held on the 21st at the Korea Federation of Banks building in Jung-gu, Seoul, are taking a group photo before the meeting. From left to right: Chanjin Lee, Financial Supervisory Service Commissioner; Yoonchul Koo, Deputy Prime Minister for Economy; Okwon Lee, Financial Services Commission Chairman; Jongwoo Park, First Deputy Governor of the Bank of Korea. August 21, 2026. Photo by Jinhyung Kang

High Interest Rates Squeeze Corporate Bond Issuance...Further Market Rate Hikes Feared

Amid sustained high interest rates, recent activity in the corporate bond issuance market has also contracted somewhat. According to the Korea Financial Investment Association, last month’s book-building (demand forecast) volume for corporate bonds was 1.625 trillion won, down 663 billion won (29.0%) from 2.288 trillion won in the same month last year. Demand forecast participation rates dropped to 514.9%, down 77.1 percentage points from a year earlier. Corporate bond issuance for the month was 10.5 trillion won, a decrease of 2.2 trillion won compared to the previous month. This trend is attributed to companies, wary of rising bond yields, choosing to delay new issuance or taking advantage of alternative funding routes—such as bank loans or commercial papers (CP)—rather than rushing into the market.

The problem is that market rates affecting companies’ funding costs could rise even further. Lately, domestic government bond yields have faced upward pressure due to the Bank of Korea’s rate hikes and the government’s expanded bond issuance, which increases supply concerns. On August 18, the three-year government bond yield surged by 5.1bp in a single day to 3.847% per annum, while the 30-year yield jumped 8.2bp to 4.751%. Though some pullback followed, even on the 20th, the three-year government bond closed at 3.811%, up 1.3bp from the previous day. An outflow of funds from bonds to riskier assets—including equities—is also cited for dampening bond investment demand and pushing up yields. Instability in the global bond market, including rising long-term government bond yields in the US and Japan, has also weighed on domestic yields.

The government is also closely monitoring the impact of rising bond yields on the real economy. Yooncheol Koo, Deputy Prime Minister for Economy and Minister of Economy and Finance, stated, "Due to recent long-term government bond yield increases in major countries, our bond market is also seeing a rise in ultra-long-term yields," adding, "We will closely monitor the situation to minimize the real-economic ripple effects such as increased corporate funding costs and higher interest burdens on households."

This rise in market rates further increases not only the cost of newly issued corporate bonds but also the refinancing burden of existing bonds. Companies already facing business challenges from domestic demand contraction and declining profitability are now confronting even heavier interest burdens. Prolonged liquidity pressures stemming from these compounding factors can lead to difficulties in principal and interest repayments, eventually pushing up corporate loan delinquency rates in the banking sector.

Jungsik Kim, Professor Emeritus of Economics at Yonsei University, stated, "Alongside rising interest rates, continued contraction in domestic demand has already weakened companies’ financial standing, with both delinquency and insolvency rates on the rise. Should the interest burden persist long-term, repayment abilities could deteriorate further, raising the risk of higher delinquency rates."

Corporate Loan Delinquency Rates Also Climbing...Financial Supervisory Service Warns of Possible Rebound

In fact, corporate delinquency rates have risen compared to one year ago. According to the Financial Supervisory Service’s "Status of Won-Denominated Loan Delinquency Rates at Domestic Banks," as of the end of June, the corporate loan delinquency rate decreased by 0.16 percentage point from the previous month but was up by 0.08 percentage point compared to the same month in the previous year. Even when tallied separately for large enterprises, small and medium-sized enterprises, small corporate entities, and sole proprietors, all saw delinquency rates climb compared to a year ago. This indicates that the debt repayment burden on companies has grown year-on-year.

As of June, the corporate loan delinquency rate has risen for two consecutive years: from 0.46% in June 2024 to 0.60% in June 2025, reaching 0.68% in June this year. Even in 2026, the rate increased from 0.68% in March to 0.74% in April and 0.84% in May, before dropping back to 0.68% in June—though this drop was largely due to increased loan write-offs and sales by banks at the end of the quarter.

The Financial Supervisory Service is also wary of the possibility that delinquency rates might rebound going forward. An official from the Financial Supervisory Service stated, "While the delinquency rate dropped sharply in June, this was largely due to banks’ expanded write-offs and loan sales at the end of the quarter. Considering the global trend of rising interest rates and ongoing uncertainties in the economic environment—such as the prolonged Middle East situation—there is a persistent possibility that delinquency rates could rebound in the future."

This content was produced with the assistance of AI translation services.