Korean asset-backed commercial paper trading in double-digit rates

Apartments under construction in Gangdong District, eastern Seoul on Oct. 24. [YONHAP]

Yields on short-term debt instruments used to finance projects, such as property developments, are trading in the double digits as confidence in the Korean credit markets has been shaken by defaults and delays.

Asset-backed commercial paper (ABCP) maturing on Dec. 23, issued by Yeouido-based Painuno and guaranteed by GS E&C, known for Xi apartment brand, trades at 21 percent.

An ABCP is short-term lending backed by assets, such as land and buildings.

The yield on an ABCP guaranteed by Taeyoung E&C traded at around 15 percent last week. The maturity date for the financial product is in January. Taeyoung E&C is known for Desian apartment brand.

“Since bond investors are viewing the real estate economy negatively, the rate for project financing ABCPs is rising as high as 20 percent,” said a bond market source. "Even the ABCPs guaranteed by companies with A-level credit ratings are being traded at yields above 10 percent.”

The government started purchasing project financing ABCPs Monday to ease the liquidity crunch. It plans to spend 1.8 trillion won ($1.3 billion) in the purchase program. But sentiment has not improved dramatically as the impact of the Legoland crisis is persisting, the policy rate is projected to rise and corporations suffer liquidity crunches.

Iwon Jeil Cha, a special purpose company established to fund the construction of the Legoland resort in Gangwon, was listed as bankrupt in early October. It had failed to repay 205 billion won in ABCP.

Heungkuk Life Insurance, which reversed a decision to redeem perpetual bonds, also contributed to the instability. It is the eighth-largest insurer in Korea.

The average yield for commercial paper with 91-day maturities was 5.36 percent on Nov. 21, according to Korea Financial Investment Association. That is the highest since 5.37 percent in January 2009.

The rapid rise of commercial paper rates has made it difficult for corporations to issue longer-term debt, increasing competition to borrow in the short-term market, which in turn upped the borrowing rate.

Following the Legoland incident, concerns about construction and brokerage firms that have guaranteed ABCPs have increased, and the demand for project financing ABCPs fell, said Kong Moon-ju, a researcher at Yuanta Securities in a report on Nov. 11.

The projected rise of interest rates is also adding to uncertainties. The Bank of Korea’s Monetary Policy Board is holding a rate-setting meeting on Thursday. The central bank is projected to increase the policy rate as inflation and Federal Reserve’s federal funds rate remain high.

Korea’s base rate currently stands at 3.00 percent, compared to a range of 3.75 to 4 percent for the federal funds rate.

“As much as the bond market has already entered the stagnation period, the process of finding stability will be tough” and will require some time, Kong added.

BY KIM DO-NYUN, JIN MIN-JI [jin.minji@joongang.co.kr]