'Low-Credit Corporate Bond Purchase' SPV to Launch on 24th... +BBB and Below Share at 15% (Comprehensive)

Bank of Korea Approves SPV Loan at Emergency Monetary Policy Committee Meeting

[Asia Economy Reporter Kim Eun-byeol] A special purpose vehicle (SPV) to purchase low-credit corporate bonds and commercial papers (CP) will be operational starting next week. While it holds significance as a safety net supply measure to ease the constricted non-investment grade corporate bond market, the overall corporate bond market is already stable, so the actual impact remains to be seen.

On the 17th, the Bank of Korea held an extraordinary Monetary Policy Committee meeting and announced the approval of the SPV loan limits and conditions. The total loan limit for the SPV is KRW 8 trillion, with the Bank of Korea lending KRW 8 trillion out of the total KRW 10 trillion fund. However, the SPV fund will initially be formed at KRW 3 trillion (KRW 1 trillion capital from the Korea Development Bank (KDB) + KRW 2 trillion loans from KDB and the Bank of Korea). The remaining KRW 7 trillion will be gradually raised through a capital call method, lending funds upon request.

The SPV plans to start purchasing non-investment grade corporate bonds, which KDB has pre-purchased for market stabilization, from the 24th. The SPV will carry out the purchase operations over six months and hold the assets for three years before liquidation.

The most important SPV operations will be managed by KDB and private experts. Investment-related decisions will be made by the SPV board of directors, which will have an advisory body called the Investment Management Committee composed of five private experts. The committee will create investment guidelines and delegate the selection of investment targets to KDB. This operational structure was decided based on the judgment that KDB and private experts have the best understanding of the corporate bond market.

The purchase targets will include all investment-grade non-financial company issuances but will focus mainly on non-investment grade bonds (A to BBB ratings). However, BB-rated bonds whose credit ratings temporarily dropped due to the impact of COVID-19 (fallen angels) will also be included. Companies holding BBB+ to BBB- rated corporate bonds maturing by the end of the year include Korean Air, Doosan Infracore, Hanjin, LS Networks, and Samhwa Paints Industrial. The maturity of purchased securities will be within three years for corporate bonds and within three to six months for CP. Purchase prices will be set at appropriate interest rate levels not lower than market rates. The SPV aims to build market investment demand and encourage companies' market financing efforts.

In principle, the SPV will focus on purchasing newly issued corporate bonds, as the issuance of non-investment grade corporate bonds has been significantly contracted recently. Last month, the participation rate in demand forecasts for BBB-rated and below corporate bonds was about 178.0%, a sharp decline compared to June last year (353.3%). Especially recently, many companies directly affected by COVID-19 have seen their credit ratings fall, so the SPV is expected to purchase corporate bonds that the market cannot absorb.

A Bank of Korea official stated, "Investment-grade corporate bonds will be purchased through the demand forecast system, and non-investment grade corporate bonds will be purchased by the SPV from unsold market volumes. In principle, purchases will focus on new issuances, but trading volumes can also be purchased if necessary for market stabilization." The portfolio will be managed with about 30% investment-grade bonds and 70% non-investment grade bonds. Among non-investment grade bonds, A-rated bonds will be maintained at 55%, and BBB+ and below at 15%.

Related agencies expect that once the SPV is operational, issuance conditions for non-investment grade bonds will improve, and corporate financing will become smoother. If COVID-19 continues and market conditions worsen further, it is also expected to cushion shocks in the funding market. A Bank of Korea official said, "The purpose is to support companies temporarily facing financing difficulties due to COVID-19," adding, "Companies with an interest coverage ratio below 100% for two consecutive years will be excluded from purchase targets."

Market and business officials evaluated that since the bond market is currently stable, the effect should be observed further. A business official said, "Although some low-credit grade corporate bonds are maturing, the situation is not as severe as in March or April," but added, "Basically, if the government supports through the SPV and lowers financing costs, it will help companies."

A bond market official said, "The significance lies more in the SPV acting as a safety net rather than producing immediate effects," adding, "Especially, the effect on the BBB-rated issuance market, which has been consistently weak since the financial crisis, should be closely watched."

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