"Female Warrior's Financial Struggles Deepen... Priority Purchase of Female Warrior Bonds from Chaean Fund and ABS Regulation Easing Needed"

Last Month, Yeojeonchae Spread 137~199bp... Higher Than Corporate Bonds A-

[Asia Economy Reporter Yu Je-hoon] As the funding difficulties of specialized credit finance companies such as card and capital companies are becoming a reality, there are calls to ease the liquidity crunch through preferential purchase of specialized finance bonds via the Bond Market Stabilization Fund and regulatory improvements related to asset-backed securities (ABS).

Professor Seo Ji-yong of the Department of Business Administration at Sangmyung University (President of the Korea Credit Card Association) stated this during a presentation titled "Analysis of Financial Risks and Countermeasures of Specialized Credit Finance Companies Due to Increased Funding Costs" at the Korea Credit Card Association Autumn Academic Conference held on the 18th.

According to Professor Seo, influenced by the base interest rate hikes that began in earnest last year, the credit spread of specialized finance bonds compared to 3-year government bonds rose to 137.0?199.9 basis points (bp, 1bp=0.01%) as of last month. During the same period, the credit spread of specialized finance bonds with an A+ rating (199.9bp) was higher than that of corporate bonds with an A- rating (197.7bp).

In particular, as the spread between specialized finance bonds and corporate bonds (AA- rating, 3-year maturity) continues to widen, the issuance volume of specialized finance bonds is also significantly decreasing. According to the Bond Information Center of the Korea Financial Investment Association, the issuance amount of specialized finance bonds last month was 1.5957 trillion KRW, down about 56% from the previous month (3.643 trillion KRW) and about 45% compared to the same month last year (2.9015 trillion KRW). These funding difficulties are directly linked to liquidity crises for specialized credit finance companies.

[Image source=Yonhap News]

Professor Seo said, "During the 2008 financial crisis, market interest rates stabilized quickly due to liquidity supply by supervisory authorities, but recently, due to persistent inflation and the implementation of tight monetary policies, it is difficult to supply liquidity to the market," adding, "There is a possibility of a liquidity crisis particularly for small and medium-sized capital companies, whose credit ratings are relatively lower compared to card companies."

Professor Seo explained that within the capital industry, which is at a disadvantage compared to card companies in terms of funding, a polarization phenomenon by credit rating is also emerging. AA- rated capital companies have relatively stable asset portfolios and face no major problems securing liquidity, whereas those rated A or below tend to have a higher proportion of high-risk assets such as real estate project financing (PF) loans or investment finance within their operating assets.

According to data cited by Professor Seo from Korea Credit Rating, the proportion of automobile installment finance assets within the operating assets of AA- rated capital companies was 29.3%, which is 22.4 percentage points (p) higher than that of A rated companies (6.9%). Automobile installment finance is the core business of capital companies and is classified as relatively high-quality assets. Conversely, the proportions of corporate loans and PF loans for AA- rated companies were 29.8% and 12.6%, respectively, which are 17.4p and 6.5p lower than those of companies rated A or below (47.2% and 19.1%, respectively).

This polarization is also reflected in actual funding. In the third quarter, the bond issuance scale of AA- rated capital companies was about 3 trillion KRW, increasing by 100 billion KRW from the previous quarter, whereas for capital companies rated A or below, it was 800 billion KRW, decreasing by 500 billion KRW. The share of capital companies rated A or below in total capital company bond issuance also dropped by 9 percentage points from 31% to 22%.

As bond issuance becomes more difficult, specialized credit finance companies are turning their attention to long-term commercial paper (CP), floating rate notes (FRN), and asset-backed securities (ABS). Although CP has a short repayment period, its funding cost is relatively low. Some specialized card companies increased the proportion of CP issuance in borrowings to over 25% in the first half of this year. Recently, as market liquidity has dried up, the issuance period for long-term CP has also shortened to within two years, less than half of the previous year. Additionally, ABS issuance is increasing. ABS, secured by accounts receivable, has the advantages of lower issuance rates and the possibility of long-term issuance. Some specialized finance companies with high credit ratings reportedly succeeded in issuing a significant volume of overseas ABS in the first half of this year.

Professor Seo argued that to resolve these funding difficulties of specialized credit finance companies, preferential purchase of specialized finance bonds through the Bond Market Stabilization Fund and relaxation or abolition of ABS risk retention regulations are necessary. The ABS risk retention regulation requires asset holders to bear a portion (around 5%) of the credit risk of ABS to prevent defaults.

Professor Seo said, "Specialized credit finance companies generally have relatively low creditworthiness and significant differences by credit rating due to leverage regulations," adding, "The Bond Market Stabilization Fund should consider preferential purchase of specialized finance bonds to stabilize the specialized finance bond market." He also stated, "Since the ABS risk retention regulation increases the cost for asset holders and reduces incentives for ABS issuance, it is desirable to temporarily lower the burden ratio or abolish the regulation."

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