Corporate Bond and CP Markets Are Tough... Why the Bill Default Rate Remains at Only 0.08%

March Bill Default Rate at 0.08%... Same Level as Last Year's Average
BOK: "Exporters' Financial Pressure Did Not Lead to Defaults"

Government to Announce Support Measures for Key Industries This Week
Discussing Corporate Bond Purchases for COVID-19 Affected Companies

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Although the domestic financial market continues to show unstable trends due to the impact of the novel coronavirus infection (COVID-19), it has been found that there are not many cases where companies have reached bankruptcy due to liquidity crunch.

According to the Bank of Korea on the 21st, the nationwide bill default rate (based on amount, excluding electronic payments) last month recorded 0.08%. Although this is four times higher than the previous month (0.02%), it is at the same level as the annual average bill default rate last year (0.08%), so it is difficult to say that the default rate has surged. Based on the duration criterion, the bill default rate only increased by 0.01 percentage points to 0.04% compared to February (0.03%).

A Bank of Korea official stated, "The bill default rate includes both corporate bonds and commercial paper (CP) default rates, and it showed a better trend than expected," adding, "Since the period of high-intensity social distancing began in mid-March as COVID-19 spread to the US and Europe, export companies have been under financial pressure, but it is analyzed that this has not yet led to bankruptcy."

The number of bankrupt companies in March was 28, an increase of 8 from the previous month.

The Bank of Korea expects that companies can withstand financial pressure for at least one or two months. A Bank of Korea official said, "The impact of liquidity crunch is expected to appear in figures no earlier than after April," adding, "Since the government is currently injecting funds to stabilize corporate bonds and CPs, if the effect appears, the default rate may not rise as much as during previous crises."

The bill default rate surged to 0.4% during the 1997 foreign exchange crisis but calmed down to 0.02%. It slightly increased during the 2008 financial crisis (0.03%), but since that was a financial crisis rather than a real economy crisis, there were not many bankruptcies among small self-employed businesses.

The total bill default amount (default amount) in March reached 157.55 billion KRW with 1,630 bills, and the bill default amount in the Seoul area was 44.99 billion KRW (678 bills).

By region, the bill default rate in provinces was higher than in Seoul. Chungbuk region had the highest bill default rate at 1.48%, meaning 1.5 bills out of 100 defaulted. The bill default rate in Gyeonggi region also reached 0.95%.

Meanwhile, according to financial authorities, the government is expected to hold the 5th Emergency Economic Meeting chaired by President Moon Jae-in this week to discuss measures related to key industries. Under the current situation, using policy banks such as the Korea Development Bank and the Export-Import Bank of Korea to guarantee or purchase corporate bonds of key industry companies hit by COVID-19 is being considered as an option. Establishing a Special Purpose Vehicle (SPV) with government payment guarantees and having the Bank of Korea purchase corporate bonds through the SPV is also known to be a major option. The Bank of Korea holds the position that if the government provides payment guarantees for corporate bonds to reduce loss risks, purchasing corporate bonds is also possible.

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