Bond sales by weaker companies will be curbedKorea’s financial watchdog said yesterday it plans to restrict relatively unhealthy financial firms from selling subordinated bonds in a bid to prevent investors from incurring damage.
The Financial Supervisory Service also said it plans to limit financial services groups from selling such junior-rated bonds via their affiliates.
The proceeds from selling subordinated bonds with a maturity of more than five years have been recognized as supplementary capital, making local banks easily rely on the issuance of such debt in raising capital. The FSS said that the sale of such debts began to pick up since 2011 after taking a hit during the 2008 global financial crisis, raising concerns that excessive sales of the bonds could damage investors.
As of end-June, local financial firms’ sales of subordinated bonds stood at 40.5 trillion won ($36.4 billion), up from 39.5 trillion won at the end of last year.
Such bonds provide higher returns, but they do not receive state-backed deposit protection and have a low priority of being redeemed compared with other debts when a company faces bankruptcy.
After banks’ sales of subordinated bonds hit a record of 38.5 trillion won at the end of 2008, the floating of such debts had been slowing until 2011.
Since then, local lenders have scurried to sell the junior-rated bonds, which amounted to 35.6 trillion won as of end-June, ahead of the implementation of a stricter new capital rule named Basel III, the watchdog said.
Under the new rules to take effect from next year, subordinated or hybrid bonds will be recognized as capital only under certain circumstances such as worsening capital adequacy ratios. This will make it difficult for banks to issue such bonds to raise capital.
“The scope of issuers is expanding into brokerage houses and other second-tier capital financing firms. So if the bonds are sold without proper information on the risks of the purchase, investors could potentially suffer,” the FSS said.