Starting from the 24th, Purchase of Low-Credit Corporate Bonds and CP... What Are the Detailed Purchase Conditions?

Operation with 30% Investment Grade Bonds and 70% Non-Investment Grade Bonds
+ BBB Rating or Below Limited to 15%
Excluding Companies with Interest Coverage Ratio Below 100% for 2 Consecutive Years

[Asia Economy Reporter Kim Eunbyeol] A special purpose vehicle (SPV) that will purchase low-credit corporate bonds and commercial papers (CP) will be operational starting next week. While it is meaningful as a safety net supply measure to relieve the constricted non-investment grade corporate bond market, the overall corporate bond market is already stable, so the actual effect remains to be seen. The total fund will be operated at 10 trillion won, with an initial 3 trillion won raised.

The SPV plans to purchase non-investment grade corporate bonds and others that the Korea Development Bank has pre-purchased from July 24 for market stabilization purposes. The SPV will conduct purchase operations for six months and hold the assets for three years before liquidation.

The purchase targets will include all non-financial company issuances with investment grade, focusing mainly on non-investment grade bonds (A to BBB ratings). However, among BB-rated bonds, those whose credit ratings temporarily fell after the full impact of COVID-19 began (fallen angels) will also be included. Companies with an interest coverage ratio below 100% for two consecutive years will be excluded from the purchase targets.

Below is a Q&A regarding the SPV operation and purchased securities.

- What is the schedule for raising SPV funds?

▲ The SPV funds will initially be raised at 3 trillion won scale (1 trillion won equity + 2 trillion won loans), and the remaining 7 trillion won will be raised step-by-step through a capital call method.

- Are financial company issuances included in the SPV purchase targets?

▲ In principle, purchases target non-financial company issuances. Financial company issuances or PF-ABCPs guaranteed by financial companies are excluded from purchase targets, but financial companies will be supported through separate liquidity support and market stabilization programs. However, if necessary, specialized credit finance company issuances will be purchased in accordance with other financial support programs (such as the Corporate Bond Stabilization Fund and P-CBO).

- When will the corporate bond purchases begin?

▲ The SPV plans to start purchasing corporate bonds and CPs from July 24.

- How is the purchase ratio by credit rating managed?

▲ Investment grade bonds will be managed at about 30%, and non-investment grade bonds at about 70%. Among non-investment grade bonds, A-rated will be managed at 55%, and BBB+ and below at about 15%. The operation will be flexible depending on market conditions.

- What if different credit rating agencies assign different ratings?

▲ If there is a discrepancy between credit rating agencies, the lower credit rating will be applied.

- Will secondary market bonds be purchased?

▲ In principle, the SPV will focus on purchasing newly issued corporate bonds. This is because issuance of non-investment grade corporate bonds has been significantly reduced recently. Last month, the participation rate in demand forecasting for BBB-rated and below corporate bonds was about 178.0%, a sharp decline compared to June last year (353.3%). Especially, 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. However, secondary market bonds may also be purchased if necessary for market stabilization.

- What is the purchase method?

▲ Investment grade corporate bonds will be purchased through a demand forecasting system, and non-investment grade corporate bonds will be purchased by the SPV from unsold market supply.

- What are the expected effects?

▲ It is expected not only to improve issuance conditions for non-investment grade bonds but also to facilitate corporate financing. If COVID-19 continues and market conditions further deteriorate, it may also cushion shocks in the funding market.

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