Capital and Securities Firms' 'Cash Flow Blockage'... Financial Supervisory Service Conducts Microscope Inspection of Fundraising Status

Commercial Vehicle Installment Financing Capital Companies Face Funding Shortage
Small Business Owners Hit Hard by 6-Month Principal and Interest Repayment Deferral Amid Difficulties in Issuing Corporate Bonds
Financial Supervisory Service Also Examines Holding Companies' Support Possibility

[Asia Economy Reporter Kwon Haeyoung] Financial authorities are closely scrutinizing the short-term funding status of capital and securities companies suffering from severe "financial circulation blockage" due to the spread of the novel coronavirus disease (COVID-19). They are conducting daily checks on funding situations while also exploring the possibility of support at the financial holding company level.

According to financial authorities on the 2nd, the Financial Supervisory Service (FSS) is focusing on the short-term funding status of capital and securities companies during daily inspection meetings chaired by the Senior Deputy Governor.

A senior official from the FSS said, "As market conditions have made it difficult to issue specialized credit finance company bonds (specialized bonds), more companies, especially card companies and capital companies, are experiencing liquidity crises. Specialized credit finance companies (specialized companies) are particularly hit hard by the government's six-month principal and interest repayment deferral measures for small business owners, resulting in no cash inflow. We are checking their short-term funding status and support measures."

Among specialized companies, capital companies with a high proportion of commercial vehicle operations targeting small business owners are more severely affected than card companies. These include Hyundai Commercial, DGB Capital, BNK Capital, and NH Nonghyup Capital. Capital companies operate without deposit-taking functions and conduct business through issuing specialized bonds and cash repayments on installment financing. However, due to the rapid deterioration of market conditions caused by COVID-19, bond absorption is failing, and combined with the government's loan deferral measures, their cash flow is drying up. In fact, the net issuance of specialized bonds in March was 91 billion KRW, sharply down from the issuance amount of 2.165 trillion KRW in January before the COVID-19 outbreak. Especially, the government's six-month or longer loan principal repayment extension and interest payment deferral measures for small business owners ordered to the secondary financial sector have raised concerns about the worst liquidity crunch. This is the first time that principal and interest repayment deferral and maturity extension measures for small business owners have been implemented in the secondary financial sector, including specialized companies and savings banks.

The FSS has also been closely examining whether support through financial holding companies is possible in addition to support via the 20 trillion KRW bond stabilization fund established by the government.

An FSS official said, "Capital companies, which have steadily increased loans to small business owners besides commercial vehicle operations, have been severely affected by the principal and interest repayment deferral measures, so we have also focused on checking the possibility of support at the holding company level. Capital companies affiliated with financial holding companies can receive credit support from the holding company or banks, but for those that are not, there is concern that this could lead to a serious liquidity crisis."

Accordingly, specialized companies are demanding the purchase of specialized bonds through the bond stabilization fund. During the 2008 financial crisis, the 5 trillion KRW bond stabilization fund purchased only 500 billion KRW worth of specialized bonds, and even then, the criteria were limited to credit ratings of AA- or higher. Since the bond stabilization fund at that time flowed only to card companies and high-quality capital companies, there are calls to expand the credit rating range for specialized bond inclusion and increase the purchase scale.

Furthermore, the FSS is closely monitoring the funding status of securities companies facing emergency liquidity needs. There are concerns that if volatility in major indices intensifies, liquidity crises could recur due to margin calls (additional collateral deposit notices) on equity-linked securities (ELS), and that funding difficulties could worsen as asset-backed commercial paper (ABCP) refinancing related to project financing (PF) fails amid concerns over a downturn in the real estate market.

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