High-yield funds near 1 trillion won

High-yield funds created by the Korean government in March are nearing 1 trillion won ($971 million), in a sign of support for President Park Geun-hye’s bid to boost small-company financing and flagging economic growth.

The funds received 951 billion won as of July 31, helped by demand from the preferential access to public offerings of stock that they grant, Korea Financial Investment Association data shows. Park’s administration and the central bank last month announced a combined 29 trillion won of extra financial support mainly focused on small- and mid-sized businesses.

Broadening financing is part of a strategy to boost growth in Asia’s fourth-largest economy after expansion slumped to the weakest pace in more than a year in the second quarter. Sales of debt rated below A- in July climbed to 135 billion won, the highest since September 2013. That compares with the 55 billion won monthly average through June from the end of September, when a conglomerate running businesses from cement to securities filed for bankruptcy.

The government’s high-yield fund program has helped lower-rated companies raise money in the bond market, according to Kim Sang-hun, a credit analyst at Shinhan Investment in Seoul. “Against the backdrop of the government’s stimulus plan for economic growth, overall credit markets will likely be stabilized,” he said.

Of the 29 trillion won in financial support, state-backed lenders will extend 10 trillion won in credit, and the Bank of Korea expanded its cheap loan program for small companies by 3 trillion won.

Authorities are seeking to rekindle the high-yield market after offerings plummeted following a string of corporate collapses, including five affiliates of the Tongyang Group that filed for bankruptcy protection in September.

The economy grew 0.6 percent in the April-June period, the slowest since the first quarter last year. The government lowered its 2014 economic growth forecast last week to 3.7 percent from 3.9 percent.

Park said on Jan. 10 that the government would establish “creative economy centers” this year that provide assistance to small- and medium-sized companies. She said the goal was to help people with fresh ideas receive financial aid without collateral, amid legislative steps to rein in the influence of the chaebol, the country’s conglomerates.

An initial public offering last week by Cuckoo Electronics, which makes home appliances including rice cookers, may also have provided the latest boost in demand for the funds, according to Shinhan Investment’s Kim.

Initial share sales have returned an average 45 percent on their first trading day since the start of 2013.

The high-yield investments carry tax incentives and are entitled to share in 10 percent of the institutional allocation in public offerings including IPOs. The funds should invest more than 30 percent of assets in bonds with ratings below A- or stocks listed on the Konex, exclusively designed for start-ups.

Such steps by the government to boost support for corporate debt should “help reduce the risk of possible credit events at companies,” Choi Jong-won, a credit analyst at Samsung Securities, wrote in a report on Friday.

Bloomberg