[Issue Interview] Korea Credit Guarantee Fund Expands Its Role: "Direct P-CBO Issuance Will Be a Safety Net for Advanced Industries"

Interview with Director of Capital Market Planning Choi Taejin
P-CBO: Guaranteeing and Selling Corporate Bonds for SMEs
70 Trillion Won Supplied Over 25 Years
Direct Issuance Enabled by Law Revision in April
"First Issuance in the First Half o

"When the economy is struggling, the capital market also tightens. For small and medium-sized enterprises, as well as mid-sized companies, it becomes even more difficult to issue corporate bonds directly. Each time, we have provided government guarantees and sold bonds on their behalf to support their funding needs. Starting next year, we will directly issue bonds, easing the interest burden for these companies. Fortunately, investor response has been positive."

Choi Taejin, Director of Capital Market Planning at the Korea Credit Guarantee Fund, is being interviewed by Asia Economy. Photo by Yoon Dongju

Choi Taejin, Director of Capital Market Planning at the Korea Credit Guarantee Fund, shared this in a recent interview with Asia Economy, stating, "We plan to directly issue asset-backed securities (P-CBO) worth about 400 billion won in the first half of next year."

P-CBO is a product designed to help small and medium-sized enterprises, as well as mid-sized companies, raise funds directly, rather than relying on bank loans. Although these companies may have lower credit ratings, their corporate bonds are purchased and, with the Korea Credit Guarantee Fund's credit guarantee attached, sold to investors. This serves as a bridge, enabling growing mid-sized or small companies to move beyond indirect financing and raise funds directly from the capital market. Through this, the Korea Credit Guarantee Fund has supplied a cumulative total of over 70 trillion won to the capital market over the past 25 years.

The Korea Credit Guarantee Fund's P-CBO has played a crucial relief role during every economic crisis. Director Choi explained, "Starting with support for the refinancing of maturing corporate bonds during the 1997 foreign exchange crisis, the program also supplied large volumes during the 2008 global financial crisis and the 2020 COVID-19 pandemic," adding, "It has consistently served as a safety net for the economy whenever the market truly faced difficulties." As a result, the Korea Credit Guarantee Fund's P-CBO now holds about 85% market share in issuance. Last year, the Korea Credit Guarantee Fund issued 4.4866 trillion won in P-CBOs, accounting for 84.9% of the total market (5.2866 trillion won). In the first half of this year, it issued 2.7624 trillion won, maintaining an 85% share of the total (3.2496 trillion won).

The issuance of P-CBOs by the Korea Credit Guarantee Fund reached a turning point this April when the "Korea Credit Guarantee Fund Act" was amended. Previously, securities firms and others would create special purpose companies (SPCs) to sell these securities, but now, after 25 years, the Korea Credit Guarantee Fund can issue them directly.

Ironically, it was the economic crisis that made direct issuance possible. Director Choi noted, "With the capital market shrinking rapidly due to the COVID-19 pandemic in 2020, the annual issuance volume, which had been around 1 trillion won, expanded to 5 trillion won and became a regular funding tool," adding, "This experience led to a growing awareness that we should try direct issuance."

Then, the 2022 Legoland incident further cemented its significance. Director Choi said, "At that time, the domestic bond market was so tight that there were concerns about its collapse," adding, "The Korea Credit Guarantee Fund took on the risk and boldly issued P-CBOs to support companies. This highlighted once again the Fund's role in stabilizing the capital market."

Direct issuance translates into cost savings for companies issuing corporate bonds. Director Choi explained, "With no fees to be paid to securities firms, the interest rates borne by companies are expected to decrease by about 0.5 percentage points," adding, "If 1.5 trillion won is issued directly with a three-year maturity, this would result in annual cost savings of 7.5 billion won, totaling 22.5 billion won over three years."

With the risk weight lowered to 0%, investment appeal has also increased. Director Choi said, "With direct issuance, the Korea Credit Guarantee Fund's P-CBOs are now recognized as special bonds. Previously, under the Financial Supervisory Service's implementation rules, a risk weight of 1.6% was applied, but this has now dropped to 0%," adding, "Investors have given real feedback, saying that these are highly attractive investment destinations, offering the same credit rating as government and public bonds but with higher yields."

Choi Taejin, Capital Market Planning Officer at the Korea Credit Guarantee Fund, is being interviewed by Asia Economy. Photo by Yoon Dongju

The Korea Credit Guarantee Fund is preparing for direct issuance, targeting the first half of next year. To this end, in July, it established the Capital Market Planning Office, which oversees all capital market operations, and formed a "Direct Issuance Task Force" under its umbrella. Director Choi stated, "The initial issuance will be around 400 billion won," adding, "We are planning products in line with government policy to provide greater support to high-tech strategic industries and companies." He also noted, "Companies in industries undergoing business restructuring that require policy support, or those temporarily facing liquidity difficulties due to factors such as U.S. tariffs, may also be included."

Overseas direct issuance is also being considered. Director Choi, who served as head of the Securitization Center in May 2022, has experience with overseas P-CBO issuance. He said, "Since it was our first overseas issuance, we were concerned about whether we could raise funds and whether the Korea Credit Guarantee Fund would be recognized. However, we ultimately succeeded in issuing at a much lower interest rate (0.35 percentage points)," adding, "In May of this year, the bonds were repaid in full without any subrogation, setting a successful precedent." He continued, "Once we gain more experience with domestic issuance, we plan to directly issue P-CBOs overseas as well."

Following the direct issuance of P-CBOs, the Korea Credit Guarantee Fund has also strengthened its presence in the capital market by launching a QIB (Qualified Institutional Buyer) corporate bond guarantee program for mid-sized companies in April. This program allows bonds and securities to be traded among qualified institutional investors, such as financial institutions, funds, and pension funds, who have sufficient risk management capabilities, while easing disclosure obligations. Although the market had become dormant since its introduction in 2012, it was effectively revived when the Korea Credit Guarantee Fund created a program to guarantee principal and interest payments on QIB corporate bonds. Director Choi, who led this initiative, said, "We essentially revived a nearly defunct system together with the Korea Development Bank," adding, "We will continue to provide companies with new funding options and opportunities to reduce financing costs."