Corporate Bond Market
The Korean government is to spend 6.4 trillion won in order to stabilize the corporate bond market. The announcement was made by the Financial Services Commission on July 8.
According to the announcement, corporate bonds will be underwritten by organizations such as the Korea Development Bank in order to issue primary collateralized bond obligations (P-CBOs). The Korea Credit Guarantee Fund (KCGF) provides credit enhancement during the course. The KCGF offers 150 billion won and the Korea Finance Corporation spends 350 billion won, while another 350 billion won is invested by means of financial support. The Bank of Korea supplies necessary liquidity.
According to the rules of the KCGF, the organization can stand surety for up to 20 times the amount of guarantee funds. However, the actual amount guaranteed is estimated at approximately 6.4 trillion won because the debentures covered by the P-CBOs have relatively lower credit ratings.
The funds are available for companies whose corporate bonds reach maturity between the second half of this year and the end of next year. It is likely that most of the beneficiaries will be those in the construction, shipping and shipbuilding industries. Of debentures maturing in the latter half of 2013, A-grade or lower amount to 10 trillion won, with approximately 4.7 trillion won in bonds found in the three more vulnerable sectors.
At the same time, the government is to provide tax support for high yield funds. Separate taxation is to be applied to the dividend income tax of corporate bond funds whose ratio of red bonds with a credit rating of BBB or lower is at least 30%.
The qualifications regarding the issuers and investors are to be strengthened in an effort to revitalize the recently introduced qualified institutional buyer (QIB) system. In addition, regulations are to be abolished, giving a much needed boost to corporate bond funds, while the Asset-Backed Securitization Act will be revised so that companies can issue asset-backed securities with greater ease.