Gov’t moves to widen demand on bond market

Finance

Published: 03 Jul. 2016, 18:34

Gov’t moves to widen demand on bond market

The Korea Development Bank (KDB) will buy a total of 500 billion won ($435 million) worth of unpopular bonds issued by small and medium-size companies over the next two years as part of efforts to boost the corporate bond market, announced the Financial Services Commission on Sunday.

According to the plan, the KDB will purchase bonds with ratings from BBB to A, which are considered less safe and have low demand in the market, to help small companies raise funds from the capital market.

The state-run financier will establish a special purpose company to buy about 30 percent of those bonds.

For bonds below the BB level, the Korea Credit Guarantee Fund (KCGF), KDB and some securities brokerage firms will run a 1.4 trillion won program to guarantee credit for small businesses by 2018.

Currently, the KCGF has been solely responsible for assuring credits of small corporate borrowers. The KDB and securities firms will take part in credit guarantees with the goal of increasing issuances of relatively risky bonds.

Companies with low credit ratings will be able to use their intellectual property rights and properties to be approved for bond issuance, the commission said.

The KDB and the Industrial Bank of Korea (IBK) will create a separate 130 billion won fund to support bond issuances by companies that have intellectual property rights but low credit levels.

“Despite external growth of the corporate bond market, the market has not been able to play its function as a financing tool for many companies because it has been dominated by risk-free bonds of large corporations,” said an official at the FSC.

The country’s corporate bond market grew from 69 trillion won in 2008 to 151 trillion won as of late 2015, according to data by the FSC. Of the total bond issuances in 2015, those with ratings below A accounted for only 22.9 percent.

The commission will also allow private equity funds (PEFs) to lend to companies, introducing the so-called “private debt fund (PDF).” Famous PDFs in the United States are Oak Tree and Apollo Global.

Institutional investors that are capable of accurately assessing risks of small companies’ bonds will be approved to subscribe to the new PDFs and offer loans to particular companies.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]