All about sub-prime corporate bonds

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– writing by Kwon Hyuk Hee

Hello everyone, today’s topic is on sub-prime corporate bonds. You should be wondering what a sub-prime corporate bond is, let’s figure it out a bit later.

Ever since 2012, companies have been issuing less sub-prime corporate bonds. What would be the reason behind this phenomenon? In most cases, sub-prime corporate bonds are issued by small-sized companies, meaning that they would have quite a hard time delivering the funds they need which is why the financial authorities and research institutes are eager to devise related countermeasures.

First, let’s find out the reasons behind this phenomenon.
1. Economic uncertainty continues leading investors to turn their eyes on investing in assets that are safe. For example, domestic assets such as government bonds and the ones issued by outstanding enterprises are driving public interests while bonds issued by small-sized companies are losing popularity.

2. As certain types of business are in a recession, credibility risks of related companies have increased. It is widely known that in the year 2012, enterprises that belong to vulnerable industries have gone bankrupt in a row.

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3. Generally, the credit ratings are appraised higher than how it is supposed to be. The ratings that are given by domestic credit rating companies are way higher than the ratings given by the renowned credit-rating agencies. Besides, there had been numerous warbles saying those domestic credit ratings are not reflecting the dangers corporations have underneath proper enough.

The conflicts mentioned above are the biggest problems of bonds published by small-sized companies. Let’s find out what are the solutions that can enhance current phenomenon.

1. Number of guaranteed bonds along with secured bonds should be increased. As mentioned above, the problematic bonds issued by small-sized firms have high credibility risks. So, trust guarantees and credit institutions should enlarge issuing of guaranteed (secured) bonds. Also, they need to invigorate publishing guaranteed corporate bonds that can reduce interest burdens. If this solution does not seem very fit, than institutions can consider adopting P-CBO (Primary Asset Backed Securities) which was widely used in monetary stringency in the past.

2. Institutions can create exclusive corporate bonds to seek normalization of corporate bond markets. In the past years of 1999 and 2008, Korean financial authorities (government) have created “stability fund for bond markets”

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3. There is a serious need of vitalizing exclusive market that only small-sized firms can use. Yes, indeed there is QIB Markets (Qualified Institutional Buyer Markets) but this does not provide much efficiency to small-sized companies as most of its issuing is done in typical markets. So, there is a need of relieving issuing requirements which can draw-in variety of investors.

You have taken a look at the problems corporate bonds small-sized firms issued have. There are lots of other possible solutions than the ones mentioned above but there are lots of threats lying behind them. However, as the Korean financial authorities including the Financial Services Commission are trying their best finding out the optimal solutions, we will soon enough hear out something. I hope to see competitiveness and vitalization of corporate bonds that are being issued by small-sized firms.

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