Sigh of Relief for Bank Bonds vs Barley Peak for Yeojun Bonds... Yeojun Bonds Are a 'Burning Issue' at 1.7 Trillion Won

Polarization of Corporate Bonds Deepens Amid 'Corona Money Drought'

[Asia Economy Reporter Kwon Haeyoung] Due to the impact of the novel coronavirus infection (COVID-19), a drought of funds has hit the bond market, causing polarization in the financial bond market. While bank bonds saw a surge in issuance last month, providing some relief, other financial bonds such as specialized credit finance company bonds (yeojeonchae) are facing a severe funding crunch, making the refinancing of 1.7 trillion KRW in bonds maturing this week an urgent issue. There are calls for the Bond Market Stabilization Fund (Cha-an Fund) to act as a firefighter.

According to the Korea Financial Investment Association on the 6th, bank bonds had a net issuance of 9.38 trillion KRW in March, a sharp increase compared to 550 billion KRW in January and 3.3 billion KRW in February.

Specifically, the issuance amount was 3.975 trillion KRW, and the redemption amount was 3.734 trillion KRW. When bonds already issued mature, companies refinance by issuing new bonds, so net issuance serves as an indicator of companies' funding conditions. Although there was a temporary liquidity squeeze due to COVID-19, the Bank of Korea included bank bonds in the unlimited repurchase agreement (RP) purchase program starting March 16, which boosted issuance. Looking at net issuance of bank bonds last month, it was only 570 billion KRW until the 15th, but surged to 8.81 trillion KRW after the 16th.

On the other hand, other financial bonds including yeojeonchae recorded a net issuance of 241 billion KRW in March (issuance 3.975 trillion KRW, redemption 3.734 trillion KRW). It sharply declined from 2.225 trillion KRW in January to 430.4 billion KRW in February, halving again within a month. Only bonds maturing are barely being refinanced, and new issuance is practically impossible.

Specialized credit finance companies such as card companies and capital companies are rapidly drying up their funding sources as market conditions worsen due to COVID-19. Since yeojeonsa do not have deposit functions, they must raise funds through bonds, but demand for yeojeonchae has plummeted due to high default risk as they serve as loan channels for medium- and low-credit borrowers. To make matters worse, the government has ordered not only banks but also secondary financial institutions to grant principal and interest repayment deferrals and maturity extensions for small business owners, further worsening the funding shortage. The credit spread on AA＋ rated 3-year card bonds widened to 68.3 basis points as of the 3rd, up from 65.2 basis points at the end of last month. Bonds worth 1.695 trillion KRW in other financial bonds are maturing this week (6th to 10th).

The polarization in funding in the financial bond market is expected to deepen further. Banks are expected to increase bond issuance as they need to expand funding supply to small business owners and SMEs. Although the recent increase in short-term bonds with maturities under one year is a burden, the aversion to bank bonds has largely eased, making market absorption feasible.

The problem lies with yeojeonchae. The key issue is to what extent and how much of the 20 trillion KRW Cha-an Fund will include yeojeonchae.

IBK Asset Management, the fund manager of the Cha-an Fund, along with sub-managers, will decide on the first bond purchases this week with 3 trillion KRW from the first capital call, considering bond ratings and maturity schedules. They will purchase four types?corporate bonds, bank bonds, yeojeonchae, and commercial paper (CP)/short-term bonds?dividing purchases between two managers each. Managers who postponed yeojeonchae purchases last week due to disagreements over issuance yields plan to switch to a competitive bidding method this week to proceed with yeojeonchae purchases.

Within the financial sector, there are opinions that the Cha-an Fund should expand the range and proportion of yeojeonchae it includes, as funding difficulties may worsen mainly for small- and medium-sized card and capital companies. Currently, yeojeonchae eligible for inclusion in the Cha-an Fund must have a credit rating of AA- or higher. The amount of other financial bonds maturing this month is 3.9338 trillion KRW.

A financial industry insider said, "During the 2008 global financial crisis, Cha-an Fund money flowed mainly to card companies and high-quality capital companies, causing severe funding difficulties for yeojeonsa, which eventually led to restructuring. The Cha-an Fund should expand the scope and scale of yeojeonchae purchases, focusing on small- and medium-sized yeojeonsa that cannot receive support from financial holding companies, to act as a firefighter for the yeojeonchae market that is facing an urgent crisis."

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