The Bank of Korea's First Big Step...Financial Authorities Extend Corporate Bond and CP Purchase Period and Expand by 6 Trillion Won

[Asia Economy Reporter Ji Yeon-jin] Financial authorities have extended the purchase period for corporate bonds and commercial papers (CP) by policy financial institutions until March next year and expanded the purchase amount. This is because the Bank of Korea took a big step (raising the base interest rate by 0.5bp) for the first time, and volatility in the short-term funding market could further increase due to rising interest rates.

The Financial Services Commission announced on the 13th that the operation deadline for four corporate bond and CP purchase programs by the Korea Development Bank and Industrial Bank of Korea will be uniformly extended from September this year (December this year for rapid corporate bond underwriting) to the end of March next year. It also announced that it will purchase up to an additional 6 trillion won, focusing on sectors with difficult supply and demand conditions such as low-credit corporate bonds and CP.

The government has been operating corporate bond and CP purchase programs with a total limit of 7.1 trillion won through these policy financial institutions since March 2020 to respond to the COVID-19 crisis. As of the end of June, the total amount of corporate bonds and CP purchased through the four programs is 3.5 trillion won, and the remaining purchase limit is 3.6 trillion won. The Financial Services Commission plans to expand the purchase scale to a maximum of 6 trillion won by utilizing not only the remaining purchase limit but also the repayment portion (2.4 trillion won) of the previously purchased corporate bonds and CP for repurchase.

According to the Financial Services Commission, the issuance amount of corporate bonds including financial bonds in the first half of this year was 89.3 trillion won, a decrease compared to the same period last year, and especially non-investment grade bonds rated A or below have been on a continuous decline since March.

Since the beginning of this year, as the pace of tightening in major countries has accelerated and the Bank of Korea's base interest rate hikes have continued, issuance yields have risen and spreads have widened. Recently, corporate bond spreads are generally higher than the peak during the COVID-19 crisis in June 2020.

In particular, the total amount of general corporate bonds maturing in the second half of this year is 15.4 trillion won, the largest scale since 2017. Among these, the amount of non-investment grade bonds rated A or below reached 6.1 trillion won (39.6%). Especially, the refinancing volume of non-investment grade bonds rated A or below is concentrated in this month (1.8 trillion won) and October (2.1 trillion won), so if interest rates continue to rise, refinancing issuance may face difficulties.

Moreover, the maturity of CP issuance is getting shorter. While issuance centered on high-quality bonds is slightly expanding, the funding conditions for low-credit and vulnerable companies have become more difficult. A Financial Services Commission official said, "If the corporate bond market conditions worsen further in the second half of this year, there is a risk that funding demand will shift to CP and short-term bonds, increasing volatility in the short-term money market. The corporate bond and CP program reform plan will be implemented immediately, and we will continue to monitor the corporate bond and CP markets through the Financial Risk Response Task Force (monthly) and the Joint Financial Market Inspection Meeting (weekly) in the future."

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