SPV Extended for 6 Months... Considering COVID-19 Resurgence and Maturities of A-Rated and Below Corporate Bonds

[Asia Economy Reporter Kim Eunbyeol] The operation of the Special Purpose Vehicle (SPV) established to facilitate smooth financing for low-credit companies has been extended by six months until July next year. Since August, the SPV participating in corporate bond demand forecasting has had the effect of narrowing the spread of A-rated corporate bonds, and it was judged that support through the SPV is necessary next year as the spread of the novel coronavirus infection (COVID-19) is expected to continue for the time being. The proportion of non-investment grade bond purchases will also be expanded to 75%, drawing positive reactions from the investment banking (IB) industry.

The Bank of Korea announced on the 24th that it held a Monetary Policy Committee meeting and extended the loan execution period for the SPV by six months. Accordingly, the purchase deadline, which was January 13 next year, has been postponed to July 13.

As of the 24th, the SPV had used about 2.5 trillion won (82.4%) of the initial 3 trillion won fund. The industry evaluated that the SPV significantly contributed to reducing the A-rated spread, and despite an increase in A-rated corporate bond issuance after September, the demand forecast competition rate rose and the issuance spread was significantly narrowed.

However, the industry consensus is that it is still not safe to relax. Kim Eun-gi, a researcher at Samsung Securities, predicted, "Considering the maturity scale of non-investment grade corporate bonds below A rating amounting to 6.4 trillion won in the first half of next year, an additional capital injection of 2 to 3 trillion won (50% support for refinancing volume) is necessary."

This is also why the SPV's purchase proportion of investment-grade bonds (AA) was lowered from 30% to 25%, and the proportion of non-investment grade bonds (A~BBB) was expanded from 70% to 75%. Representative BBB-rated issuers with maturities next year include LS Networks, Doosan Infracore, Hanjin, Korean Air, and AJ Networks.

The government and the Bank of Korea stated, "This decision was made to facilitate financing for low-credit companies struggling due to the prolonged COVID-19 pandemic."

The SPV operates on a capital call basis, raising only part of the investment funds initially and executing additional investments according to subsequent demand. As the first execution amount of the SPV, which was raised to a scale of 10 trillion won, is almost exhausted, a second capital call of 2 trillion won is being implemented to secure additional purchasing capacity.

The Bank of Korea will execute the same amount as the first senior loan of 1.78 trillion won, and the Korea Development Bank will also provide a subordinated loan of 220 billion won. The second capital call will be conducted entirely through loans. Thus, combining the first and second rounds, a total of 5 trillion won in SPV funds has been raised.

The SPV was established by the government, Korea Development Bank, and the Bank of Korea to resolve corporate financing difficulties and prevent liquidity crunch in response to the COVID-19 crisis, following discussions at the 4th Emergency Economic Central Countermeasures Headquarters in July. The government supports risk absorption resources through equity investment, the Bank of Korea supplies liquidity through loans, and the Korea Development Bank operates the SPV.

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