Gov't creates new entity to buy commercial paper

The government, the Bank of Korea (BOK) and the Korea Development Bank (KDB) Wednesday announced plans to create a so-called special purpose vehicle (SPV) to buy commercial paper to maintain liquidity in an economy shaken by the coronavirus pandemic.

The SPV will have a 10 trillion won ($8.12 billion) finance pool to purchase corporate bonds, including unsecured corporate paper.

The BOK will finance 80 percent of the pool with the rest covered by the KDB. Half of the KDB's contribution will be funded by the central government.

While most of the funding comes from the central bank, the involvement of the government and the state-owned KDB is meant to share credit risks.

The SPV will be managed by the KDB and be run for six months.

The government said the size of the finance pool could be doubled if necessary.

The SPV will mostly be buying bonds from companies with credit ratings of A or above, with a maximum maturity of three years. But it will also buy bonds from companies with credit ratings that have dropped from investment grade of BBB- or higher to BB or lower due to the coronavirus.

Companies whose interest coverage ratio was below 100 percent for two consecutive years, which means they can’t even pay back interest on outstanding debt, will be excluded.

This is the first time that the BOK has directly become involved in shoring up the value of corporate bonds.

As the Bank of Korea Act prevents the central bank’s direct investment in companies, the government has taken an indirect approach through the SPV.

“This is a new cooperative model where the central bank will be supporting liquidity,” said Vice Finance Minister Kim Yong-beom, “while a state-owned financial institution's expertise will be added.”

Yoon Myun-shik, BOK senior deputy governor, said the SPV is being created to prevent financial risks spilling over to the real economy.

“Companies with low credit ratings are in a situation where their difficulties are piling up as their sales performances have been worsening as a result of Covid-19,” Yoon said, "while there’s a shortage of capital in the financial markets."

In a separate meeting, Finance Minster Hong Nam-ki said the government will immediately execute a plan to create a minimum of 550,000 jobs in the public sector under the banner of the Korean New Deal once 3.5 trillion won in the third supplementary budget is approved by the National Assembly.

The government last week announced that it will try to create 1.56 million jobs in the wake of the coronavirus. While most of the jobs will be created in the public sector, the government promised additional support including easing of regulations in the private sector.

“We will mobilize all means including fiscal and financial support as well as regulatory reforms so that sustainable and quality jobs will be created in the private sector,” Hong said.

He added that the government will include measures that would stimulate consumer spending and investment for the second half that will be announced next month.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]