State Eases Junk Bond Law

Two new financial products will be offered for sale by financial services firms next month when the government relaxes restrictions in a bid to activate the the high-yield, high-risk bond market.

The new offerings will be junk bond funds with tax-free returns and wrap accounts focusing on junk bonds. The government said Tuesday that it would introduce the necessary legislation in this month's special session of the National Assembly.

A junk bond fund invests more than 30 percent of its money in noninvestment-grade bonds with a low credit rating, BB or lower. Investors who contract with such funds by the end of 2002 will be exempted from taxation on investment income of 30 million won ($23,077) or less. To qualify for the tax exemption, the money must remain in the fund for more than one year.

"Such funds will post returns of about 10 percent, thanks to tax exemption," said an official at the Ministry of Finance and Economy.

In a wrap account, a brokerage provides a variety of investment services, in exchange for a flat quarterly or annual fee, which covers all administrative and management expenses. In the local financial market, brokerage firms have been allowed to offer only consulting and other passive services under a wrap program. But new wrap accounts will be launched next month in which brokerages manage money independently.

More than 30 percent of these accounts must be invested in high-yield and high-risk noninvestment-grade bonds or funds investing in such bonds. The remaining amount must be invested indirectly through funds operated by investment trust firms.

The brokerage sector was skeptical about the outlook for the new financial packages.

"The new-type wrap accounts may attract investors who want high yields despite high risks," said Oh Hi-yeol, an official at Samsung Securities. "But we are not sure that investors will be sufficiently satisfied with the new packages, because brokerages are not allowed to invest directly in any financial instruments except junk bonds."

"The new wrap accounts were made in haste for promotion of investment in junk bonds," pointed out Choi Young-nam, an official at LG Investment & Securities. "The packages are not likely to be so popular."

by Kim Kwang-ki