Many Companies in Dire Need of Support
The South Korean government put its bond market stabilization fund into operation last month and the 20 trillion won fund’s corporate bond purchase stood at just 620 billion won as of May 13. In addition, the actual approval rate of the government’s P-CBO program for companies with low credit ratings stood at 25 percent and its first liquidity support is expected to be provided late this month at the earliest.
The bond market stabilization fund has gone to 11 companies so far to record a corporate bond purchase of 620 billion won. The operation of the fund is far from satisfactory in that corporate loans in the banking sector increased by no less than 27.9 trillion won in April this year alone. Bond investors are still hesitating in spite of the fund. On May 12, the spread between unguaranteed, three-year and AA- corporate and three-year government bonds was 75 basis points, up 15.5 basis points in about six weeks.
The bond market stabilization fund has limited its purchase to a level much higher than private bond valuation companies’ average assessment while ruling out companies with negative outlooks. For instance, the fund has refused to contain Hanwha Solutions, in spite of its AA- credit rating, due to the possibility of downgrading. This affected institutional investors in relation to the company’s demand forecast last month, leading to zero effective demand, and many other companies with low credit ratings are refraining from issuing corporate bonds.
Market stabilization is another reason for the low budget execution rate. These days, higher coupon rates are attracting general investors to the corporate bond market and institutional investors are resuming their purchase with the short-term fund market stabilizing. Korea Development Bank’s corporate bond acquisition is continuing at 10 billion won to 40 billion won and Hyundai Motors and LS Electric successfully finished their demand forecasts late last month.