Forgotten Lesson
Securities firms associated with conglomerates are continuing to purchase the corporate bonds of their subsidiaries even in the wake of Tong Yang Securities’ incomplete sales of the subprime corporate bonds of the Tong Yang Group.
It has been found that Dongbu Securities recently bought 20 billion won (US$18.8 million) worth of corporate bonds of Dongbu Steel, which has a credit rating of BBB. According to the Financial Supervisory Service, a total of six stock firms have engaged in the practice just this month. Although most of them dealt with debentures of an A- or higher rating, the fact that local credit rating agencies are not suggesting an objective credit rating to the subsidiaries has to be taken into account.
For example, when LIG Construction filed for court receivership two years ago, the commercial papers’ credit rating was A3-, which is investment grade. When Woongjin Holdings filed for court receivership in September last year, the rating was A-, still investment grade.
Dongbu Steel issued corporate bonds worth 40 billion won (US$37.7 million) on October 16 and handed half of them over to Dongbu Securities. The problem is that Dongbu Steel is a non-investment grade company with a rating of BBB. Credit rating agencies consider that BB+ or lower rated companies have problems with capital and interest repayments.
This is why the latest revision to the Financial Services and Markets Act became effective on October 24, so as to prevent securities companies from recommending non-investment grade subsidiaries’ corporate bonds and commercial papers to customers. The financial authorities are planning to limit the credit ratings of commercial papers and asset backed short-term bonds that can be purchased by individuals to A1 and A2 as well.
All of the other subsidiaries excluding those of the Dongbu Group have a credit rating of at least A-. For instance, HMC Investment Securities, affiliated with the Hyundai Motor Group, purchased 50 billion won (US$47.2 million) worth of subsidiary bonds. The amount can be divided into 10 billion out of the 30 billion won in bonds issued on October 10 by Hyundai Dymos, and 40 billion out of the 200 billion won in bonds issued on the following day by Hyundai Engineering and Construction. The two subsidiaries’ ratings are A+ and AA, respectively.
Hanwha Investment and Securities also purchased subsidiary debentures worth 20 billion won (US$18.8 million) in total, including the 10 billion won in bonds issued by Hanwha Galleria on October 14 and the same amount of bonds issued by the holding company of the group. Hanwha Galleria and Hanwha have a rating of A- and A each. Hyundai Securities purchased 11.2 billion won (US$10.6 million) worth of bonds of Hyundai Merchant Marine, whose rating is A-.
“Things are still good for the companies that deal with the bonds by means of the associated stock firms, but those with lower credit ratings are finding it difficult to issue debentures themselves,” said an industry insider, adding, “Although most of the companies have a high credit rating, we still need to remember the repercussions of the recent Tong Yang Group scandal.”