Soaring CP Interest Rates... Short-Term Funds to Be Injected This Month

Despite Government's Financial Stability Support Announcement,
CP Rates Rise 1.87%, Up 0.22%P
Large-Scale Issuance by Securities Firms Impact
Companies Face Refinancing Difficulties, Credit Risk Increases

Liquidity Squeeze Leads to Early Injection by Month-End
Funds First Allocated to Securities and Capital Firms
Relief Expected for Funding Concerns

[Asia Economy Reporters Ki Ha-young and Lee Min-ji] The government is advancing the timing of fund injection from next month to the end of this month to stabilize the short-term funding market. Securities firms and capital companies are facing difficulties securing liquidity in the short-term funding market. Recently, corporate commercial paper (CP) has not been smoothly absorbed in the short-term funding market, causing interest rates to rise sharply and increasing concerns.

◆ Increased volatility in CP interest rates = According to the Korea Financial Investment Association on the 26th, the interest rate on 91-day CP (A1 grade standard) was 1.87% per annum, up 0.22 percentage points from the previous day. Compared to the beginning of this month (1.55%), it rose about 0.32 percentage points. After the Bank of Korea cut the interest rate by 0.5 percentage points on the 16th, the CP interest rate fell to 1.36%, but soon returned to an upward trend.

There are criticisms that the government's financial stability package has not significantly influenced interest rate stabilization. On the 24th, financial authorities announced they would inject 7 trillion KRW to stabilize the short-term funding market, providing 5 trillion KRW for securities firms' liquidity and 2 trillion KRW for high-quality corporate market borrowing, but CP interest rates surged the very next day.

The large issuance of CP by securities firms to meet additional margin calls caused by the sharp drop in underlying assets of equity-linked securities (ELS) had a significant impact. Dongsoo Shin, a researcher at Eugene Investment & Securities, said, "As securities firms' borrowing demand increased and companies found it difficult to refinance maturing CP, CP interest rates surged, causing the short-term funding market to freeze." The rise in CP interest rates amid low interest rates signals increased corporate credit risk. As the risk of corporate defaults grows, a red light has turned on in the funding market.

As the burden on the short-term funding market intensifies, private credit rating agencies expect the creditworthiness of securities firms to decline. Korea Ratings, a private credit rating agency, downgraded the credit outlook for the securities industry to 'negative,' citing greater liquidity burdens compared to other sectors. Anna Young Ahn, senior researcher at Korea Ratings' Financial Sector 2, said, "Due to the asset and liability structure, there is a very high proportion of short-term funding and operations. If even contingent liabilities such as asset-backed commercial paper (ABCP) fail to be refinanced, it will result in a massive funding burden."

◆ Authorities "Advancing fund injection" = As liquidity tightening becomes evident mainly among securities firms and capital companies, financial authorities have decided to expedite fund injections into the short-term funding market. A Financial Services Commission official said, "We will first inject funds into securities firms and capital companies currently struggling in the short-term funding market," adding, "If possible, we aim to make actual fund injections within this month." The government had previously announced a financial market stabilization plan worth about 100 trillion KRW, allocating 48.5 trillion KRW to markets including stocks, corporate bonds, and short-term funds, and had forecasted that actual fund injections would begin early next month through bond market stabilization funds, among others.

Capital companies are feeling relieved. An official from the credit finance industry said, "With government support measures such as purchasing credit finance bonds through the bond market stabilization fund expected to be implemented as early as this month, concerns about fund procurement have eased," adding, "In the long term, the funding market is expected to stabilize."

The credit finance industry also requested government support at a meeting between Prime Minister Chung Sye-kyun and heads of financial associations held the previous day. Kim Joo-hyun, chairman of the Korea Credit Finance Association, suggested that if fund procurement becomes difficult, easing the financial burden on small business owners could become a burden for credit finance companies. Financial Services Commission Chairman Eun Sung-soo responded, "If capital companies request capital calls, we will actively support them."

Recently, the funding situation in the capital market has deteriorated rapidly. Credit finance companies such as credit card and capital companies do not have deposit functions and raise funds necessary for operations by issuing credit finance bonds and asset-backed securities (ABS). If credit finance bond issuance fails or refinancing is rejected, they immediately face liquidity crises. As of the 25th, the 3-year credit finance bond (unsecured AA+) interest rate was 1.681% per annum, up 0.241 percentage points from 1.440% on the 16th when the base rate was cut. Especially, capital companies serving many medium- and low-credit borrowers are expected to see faster deterioration of loan assets due to the economic downturn, accelerating the sell-off of credit finance bonds. Some capital companies, such as Korea Investment Capital, have proactively minimized new loans considering difficulties in raising funds through credit finance bond issuance.

Hwang Se-woon, a research fellow at the Korea Capital Market Institute, said, "If direct support is provided starting from the weakest link, refinancing support will be provided for CP maturing this month," adding, "However, for interest rates in the short-term funding market to stabilize, signals that corporate creditworthiness is stable must appear, so it will take more time."

This content was produced with the assistance of AI translation services.