Conglomerates eligible for bonds

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Conglomerates eligible for bonds

To help ailing conglomerate builders suffering from a liquidity crunch triggered by the prolonged global economic slowdown, the Financial Services Commission (FSC) said yesterday it will again allow them to benefit from government-initiated primary collateralized bond obligations starting next month.

The turnaround comes six months after the financial regulator excluded conglomerates’ construction arms from the program introduced in August 2010.

When the FSC raised the amount of issuable government-supported collateralized bond obligations to 4.3 trillion won ($3.95 billion) from 3 trillion won last August, it opened the door only to small- and medium-sized builders with low credit ratings.

But the financial regulator has changed its mind as even conglomerate construction companies are under stress.

“Due to the prolonged slowdown in the construction industry, companies are agonizing over financial distress,” said Ko Seung-beom, an official at the FSC’s industry finance bureau. “This has led big builders with a credit rating lower than A-level to find it increasingly difficult to issue corporate bonds on their own.”

Primary collateralized bond obligations are an investment-grade bond backed by a large pool of junk corporate bonds and guaranteed by an institution. A special agency will acquire the debts issued by small businesses and sell them to investors. The debt will be backed by the state-run Korea Credit Guarantee Fund, which will reduce risk and strengthen credit ratings of the bonds.

Ko said Samsung Engineering & Construction, Hyundai Engineering & Construction, SK Engineering & Construction, Lotte Construction, Posco Engineering & Construction and other construction arms of the nation’s biggest conglomerates will be restricted from issuing the bonds.

The Fair Trade Commission prohibits the top 10 conglomerates from making mutual investments with or providing debt guarantees to their affiliates.

Conglomerate construction arms that rank 11th or lower, including Doosan Engineering and Construction, Dongbu Corporation and STX Construction, will be able to issue as much as 100 billion won of government-supported bonds, while small- and medium-sized builders can issue half that, the FSC said.

Of 4.3 trillion won in bonds allocated for this year, the FSC said 719 companies issued a combined 2 trillion won as of the end of January.

The FSC said the Korea Credit Guarantee Fund will issue the first primary collateralized bond obligations targeting small- and medium-sized construction businesses on Feb. 27 and conglomerates in March.

It said bonds issued by middle-sized builders will have yields of 4.6 percent to 6 percent depending on maturity period. Small construction firms will have yields of 4.1 percent to 5.9 percent.

By Kim Mi-ju []
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