'PF Restructuring in Full Swing' Bond Market on High Alert Amid Supply-Demand Concerns

Surge in Bank and Non-Bank Corporate Bond Issuance
Liquidity Secured to Prepare for 'LCR Regulation + PF Defaults'
Concerns Grow Over Bond Market Supply-Demand Deterioration

As project financing (PF) restructuring initiated by financial authorities intensifies, the bond market has entered a state of tension. This is because the supply volume is likely to increase significantly as financial companies issue bonds to build PF reserves. Recently, concerns have emerged that the bond market's supply and demand situation will become unstable again as the net issuance volume of bank bonds and specialized finance company bonds (bonds issued by credit specialized financial companies) rapidly increases.

Bank Bonds and Specialized Finance Company Bonds Net Issuance of 16 Trillion Won in April and May Alone

According to the Korea Financial Investment Association on the 16th, banks have net issued bonds worth 4.52 trillion won from the beginning of May until the 14th. If the trend continues, about 10 trillion won worth of bank bonds are expected to be net issued in May alone. Following the net issuance of 10.5 trillion won in bonds last month, banks will issue 20 trillion won more bank bonds than the matured volume over two months.

The reason banks have embarked on large-scale bond issuance is to meet the Liquidity Coverage Ratio (LCR). Financial authorities plan to raise the LCR applied to banks to 100% starting July. Last year, the LCR ratio for banks was to be raised from 95% to 100%, but reflecting financial market instability, the existing 95% application was deferred for one year until June this year.

LCR refers to the ratio of immediately liquidatable liquid assets that banks must hold to cover net cash outflows over 30 days. When the regulatory ratio is raised, banks must fill the shortfall in their holdings of liquid assets, including cash. Also, to stabilize the bond market, banks have minimized bond issuance, but now the backlog of bank bond issuance is flooding out.

In addition to bank bonds, the supply volume of other financial bonds issued by specialized finance companies (credit card companies, capital companies) is also rapidly increasing. Other financial bonds were net issued worth 1.4083 trillion won in just the first half of May. From January this year to last month, the net issuance amount of specialized finance company bonds was only 1.3 trillion won. The net issuance amount of other financial bonds in the first two weeks of May exceeds that of the previous four months.

The increase in net bond issuance by specialized finance companies is closely related to PF restructuring. In particular, as capital companies have begun to issue bonds in earnest to build PF-related reserves, the issuance amount of specialized finance company bonds has increased significantly. The improvement in bond issuance conditions, due to the downward stabilization of the sharply rising specialized finance company bond interest rates last year, also acted as a background for increasing fund procurement.

Concerns Over ‘Supply and Demand Instability’ as Financial Bond Issuance May Increase Further

As PF restructuring intensifies, financial companies' bond issuance is expected to continue increasing.

Financial authorities recently disclosed the 'Future Policy Direction for the Orderly Soft Landing of Real Estate PF.' The core content is to apply new business classification criteria to induce restructuring and voluntary sales for PF projects with high default risk and to proceed with write-offs and auction procedures for PF bonds that are almost certainly in default.

Additional reserve accumulation by financial companies during the PF restructuring process has become inevitable. According to financial authorities, among current projects, the lowest-rated 'deterioration concern' projects required financial companies to set aside about 30% of the loan amount as reserves, but under the new criteria, the lowest 'default concern' projects must accumulate reserves at about 75%.

Reserve burdens increase not only for the 'default concern' grade but also for each default stage of PF loans. Depending on the default stage, the reserve burden can more than double. A capital company official predicted, "From the second quarter, the reserve burden of securities companies, specialized finance companies, and savings banks will increase significantly."

The maturity burden of existing bonds is also considerable. Bank bonds face an average monthly maturity of 18 trillion won from June to December. Specialized finance companies face an average monthly maturity of about 7 trillion won. Banks and specialized finance companies together must respond to bond maturities totaling 125 trillion won over the next five months. Considering the net issuance volume required to accumulate PF reserves, the bond supply and demand burden is likely to worsen.

A bond market insider said, "Although the issuance volume of public and corporate bonds has decreased recently, the net issuance volume of bank bonds and financial bonds has not yet posed a significant burden on the bond market," but expressed concern that "if the trend of expanding financial bond supply continues, it could become a burden on the bond market." An investment banking (IB) industry official forecasted, "Especially as the reserve burden increases for the secondary financial sector with large exposures to mezzanine or subordinated bridge loans, bond issuance by specialized finance companies will mainly increase."

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