[Donmaekgyeonghwa] Chaean Fund's 20 Trillion Won Insufficient... Securities Firms Say "SPV or Special Loans Needed"

Year-End Maturity of PF Securitization Bonds
Issuance by Securities Firms Reaches 27 Trillion Won
Construction Companies at 5.1 Trillion Won in Same Period

To Avoid Shifting Burden in Chaean Fund,
LCR Measures Must Be Temporarily Suspended and Loan-to-Deposit Ratio Lowered

Temporary Relaxation of NCR Regulations Also Needed

[Asia Economy Reporters Sim Nayoung, Lee Changhwan, Hwang Junho] According to NICE Credit Rating, the outstanding balance of PF securitization bonds (ABSTB, ABCP) maturing at securities firms from October to the end of the year amounts to 27 trillion KRW. During the same period, construction companies face about 5.1 trillion KRW.

Credit rating agencies are most concerned about the liquidity crisis in the issuance market transferring into credit risk for each market participant. Lee Myungjun, Senior Researcher at NICE Credit Rating, analyzed, "Currently, securities firms are managing to handle the refinancing issuance volume with the liquidity they hold, but if this situation prolongs, the credit risk of construction companies and securities firms due to suspension of refinancing issuance will increase."

Construction companies and securities firms are indeed facing significant difficulties in raising funds. Lotte Construction announced on the 20th that it will borrow 500 billion KRW for three months from Lotte Chemical. This came just two days after announcing a 200 billion KRW capital increase on the 18th. The company has PF ABCP (Asset-Backed Commercial Paper) maturing within the year amounting to 3.1 trillion KRW.

Companies with parent firms are somehow holding on, but smaller construction companies are unable to secure funds and are facing immediate bankruptcy risks. Wooseok Construction, the 6th largest construction company in the Chungnam region, was processed for a first bankruptcy at the end of last month after failing to cover a bill payment deadline.

Korea Investment & Securities fully purchased the matured Wanju PF ABCP on the 19th. Usually, refinancing issuance reduces liquidity burdens, but investors refused refinancing, so the lead manager Korea Investment & Securities used its own funds. Kyobo Securities fully purchased the matured Cheonan Northern BIT Rich First Tranche Asset-Backed Short-Term Bond (ABSTB) on the 12th.

Hwang Kyuwan, Research Fellow at Hana Financial Management Research Institute, said, "The 20 trillion KRW bond market stabilization fund the government is preparing seems insufficient to respond to the liquidity crunch caused by this incident," adding, "It will put out the urgent fire, but PF issuance credit crunch could recur anytime, so the support scale needs to be increased."

On the 23rd, Lee Bok-hyun, Governor of the Financial Supervisory Service, Lee Chang-yong, Governor of the Bank of Korea, Choo Kyung-ho, Deputy Prime Minister for Economy, Kim Joo-hyun, Chairman of the Financial Services Commission, and Choi Sang-mok, Senior Secretary for Economic Affairs, posed before the start of the 'Emergency Macroeconomic and Financial Meeting' held at the Bankers Hall in Jung-gu, Seoul. Photo by Yoon Dong-joo doso7@

◆Banks: "Additional Regulatory Relaxation Measures Needed"

Banks are voicing that for the bond stabilization fund to work properly, measures should be taken first so that commercial banks do not have to scramble more for funding. A financial sector official said, "The 20 trillion KRW bond stabilization fund is mainly funded by the five major financial holding companies, but if they issue more bank bonds to raise money for the fund, it’s just like ‘robbing Peter to pay Paul.’ The financial authorities should postpone the normalization of the Liquidity Coverage Ratio (LCR) regulation to reduce bank bond issuance by commercial banks and lower the loan-to-deposit ratio regulation so that banks can secure spare funds."

If the liquidity crunch does not ease, there are calls to temporarily relax not only the banks’ LCR normalization postponement but also securities firms’ Net Capital Ratio (NCR) regulations. A financial sector official said, "Recently, financial companies’ issuance of capital securities is a measure considering capital ratios, so if securities firms’ NCR is also relaxed, overall liquidity in the market will increase, making it easier for banks to support loans and helping stabilize the market."

There are additional requests from banks related to LCR. When banks participate in the Securities Market Stabilization Fund (증안펀드), 10% of the committed amount is considered a cash outflow. However, since the purpose is to support the government and financial markets, they want this not to be considered a cash outflow and excluded from LCR calculations. An official from E Bank explained, "LCR requires banks to hold cash relative to cash outflows to prepare for bank runs, but even if the funds are not actually used in the stabilization fund, a certain percentage of the committed amount is counted as cash outflow, which lowers the LCR ratio. If unused commitments are excluded from cash outflows, the LCR ratio decline can be defended."

On the 23rd, at the Korea Federation of Banks building in Jung-gu, Seoul, Lee Bok-hyun, Governor of the Financial Supervisory Service, Lee Chang-yong, Governor of the Bank of Korea, Deputy Prime Minister for Economy Choo Kyung-ho, Financial Services Commission Chairman Kim Joo-hyun, and Chief Presidential Secretary for Economic Affairs Choi Sang-mok explained the results of the 'Emergency Macroeconomic and Financial Meeting' after attending the meeting. Photo by Yoon Dong-joo doso7@

Securities Firms: "SPV or Special Financial Stability Loans Also Needed"

Within the securities industry, there are criticisms that this measure is a ‘stopgap’ and may cause side effects later. Moon Namjung, a researcher at Daishin Securities, pointed out, "The liquidity crunch occurred amid steadily rising market interest rates due to the Bank of Korea’s base rate hikes and global liquidity tightening, and this measure can be seen as conflicting or limited given the policy stance." Injecting liquidity during a rate hike phase is inconsistent with the Bank of Korea’s stance. The effect of liquidity support may also be offset by further rate hikes.

Baek Yunmin, a researcher at Kyobo Securities, also said, "The market expected the inclusion of a corporate liquidity support organization (SPV) or the special financial stability loan system requested by the Korea Financial Investment Association, but these were not included. Considering the monetary policy stance, these measures are expected to be difficult to decide, so the effect of this policy may be limited."

Kim Junsu, a researcher at Kiwoom Securities, said, "This measure is ultimately a stopgap, and side effects from liquidity supply measures are expected. It may encourage the issuance of special bonds for funding, deepening oversupply and crowding-out effects." He added, "The remaining issue is how quickly the support funds will be deployed where needed."

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