In order to prevent from the potential credit crunch among financially troubled industries and companies as well as to stabilize corporate bond market, the FSC announced corporate bond market stabilization plan. Financial authorities led by the FSC laid out the action plan for invigorating currently depressed bond market: support liquidity program through P-CBO, improve funding condition in corporate bond market, improve corporate bond market infrastructure. Considering the fact that continuous bankruptcy may cause a severe effect to consumers as well as overall national economy, it is necessary to implement practical measures to ease financing activities of companies.
Beginning from this year, companies have experienced a severe difficulty in issuing bonds for delivering capital inflow. Current deterioration is derived from not only rebounds from interest rate due to the exit strategy among advanced economies such as the United States, but also corporate credit ratings keep falling.
Especially corporate bond issuances with BBB rating or lower keep decreased since the global financial crisis. Obviously investors prefer A rating or better to others since they are afraid of credit default risk. However, it seems investing preference on A rating also is withering as well. Accordingly the Woongjin incident last year may lose their propensity to good ratings.
To prevent from further turmoil of corporate bond market, the government expects to implement following measures:
1) Support liquidity program through P-CBO (Primary Collateralized Bond Obligations).
The government plans to provide a liquidity by leveraging its own financial arms, such as the KDB(Korea Development Bank) and the CGF(Credit Guarantee Fund). According to the plan, the KDB expects to buy 80% of total bond obligation from corporates. In need of sharing the risk, the obligation shall be spread to other financial vehicles (bond stabilization fund, creditor banks, P-CBO).
A review committee will be entitled to select recipients’ bond based on its thorough review of self-turnaround plan.
2) Revise policy support to improve funding conditions in corporate bond market
In terms of stimulating corporate bond market, taxation benefit for high yields funds will be granted and the requirement conditions for issuers and investors will be eased as a means to vitalize QIB(Qualified Institutional Buyer) system. Also it is expected to allow qualifying corporate bonds taken over by affiliated companies to be securitized funds regardless of the certain period.
3) Improve corporate bond market infrastructure
With a Lesson from the abrupt bankruptcy last year, credit rating system expects to be examined in order to strengthen requirements for troubled corporates. Also monitoring on bond market players, securities and bond management firms expect to be reinforced to prevent any possible distortion and improve its transparency in the market.