The issuance of primary collateralized bond obligations (P-CBOs) is on a gradual decline. A P-CBO is a kind of asset-backed security (ABS) issued to help small and medium-sized enterprises raise funds by selling bonds.
P-CBO issuance expanded to seven trillion won (about US$6 billion) in 2017 as the bonds were used to help financially troubled affiliates of large corporations raise funds. But the issuance volume was reduced to five trillion won (about US$4.3 billion), which suggests that many corporations have completed restructuring.
The balance of P-CBOs was estimated at 5.32 trillion won (about US$4.57 billion) as of Dec. 30 in 2019, down 18.3 billion won (about US$15 million) from the 5.34 trillion won (about US$4.60 billion) recorded on Jan. 2, 2019. However, compared to the 7.4 trillion won (about US$6.38 billion) at the end of 2017, it fell by more than 2 trillion won (about US$1.7 billion) in two years.
P-CBOs are based on newly issued corporate bonds with single B to tripple B rating. They are designed to help small enterprises that have difficulty in issuing bonds on their own due to low creditworthiness. A securities company underwrites the bonds issues by small enterprises and transfer them to a special purpose company (SPC), which securitizes the whole bond assets and sell them to raise funds. In this process, the Korea Credit Guarantee Fund provides credit enhancement to P-CBOs so that triple A rating may be afforded to the issuer.
P-CBOs made their debut in the Korean financial market in 2003. Since 2013, large companies have been allowed to apply for the P-CBO program. Accordingly, financially troubled affiliates of large conglomerates were included in the P-CBO program, which expanded the P-CBO market. In 2016, large companies such as Hanjin Shipping, Hyundai Merchant Marine, and Dongbu Steel raised funds through the P-CBO market during their liquidity crisis.
As restructuring of large corporations has been completed, there is more room to support small and medium-sized enterprises (SMEs) through the P-CBO program, financial market experts say. In fact, the government introduced a plan to support auto parts companies using the P-CBO program in 2019. The government raised funds in cooperation with automakers and Korea Credit Guarantee Fund and provided 93 billion won in financial support for 93 auto parts companies in 2019. In 2020, the government plans to provide 350 billion won (about US$300 million) in financial support.