57 Trillion Won in Yejeonchae Set to Mature This Year Amid Middle East Risk... Will Additional Bond Market Stabilization Fund Be Injected as Short-Term Bond Concentration Deepens?

With heightened market instability following the collapse of peace negotiations between the United States and Iran, concerns about a credit crunch for specialized credit finance companies (SCFCs) are resurfacing. In response, financial authorities are considering injecting additional funds into the Bond Market Stabilization Fund. The rapid deterioration in funding conditions has been triggered by a spike in global bond yields, following the Middle East crisis, which has caused SCFC bond yields to rise in tandem. As the issuance of short-term bonds has become concentrated, shortening the maturity structure, there are growing concerns about a widespread "funding drought," especially given the 57 trillion won in SCFC bonds maturing this year alone.

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According to financial authorities on April 14, the government currently views the SCFC bond market as the "weakest link" in the domestic bond market and is closely monitoring the situation.

An official from the Financial Services Commission stated, "The spread (interest rate difference) between SCFC bonds and government bonds is currently in the 70 basis point (bp) range (1bp = 0.01 percentage point), but we consider the 80-90bp range to be an entry into the risk zone, and over 100bp as a critical stage," adding, "If the spread enters the 80-90bp range, we will implement measures such as additional purchases of SCFC bonds."

The fact that financial authorities are considering the option of injecting additional funds, following their purchase of 200 billion won worth of SCFC bonds in November 2023 for the first time since then, is interpreted as a preemptive measure to block the spread of market panic.

SCFC bonds are a key funding source for credit card and capital companies, but the market environment has rapidly worsened recently. As of April 13, the yield on three-year SCFC bonds (unsecured, rated AA-) stood at 4.116%. This spread of 73bp compared to the three-year government bond yield (3.38%) has widened significantly in just a few months, considering it was at 54bp at the start of the year.

This widening gap is rooted in the rise of U.S. Treasury yields triggered by instability in the Middle East. As inflation concerns have solidified expectations for prolonged high interest rates, government bond yields have risen, and with SCFC bonds carrying relatively lower credit ratings, an additional risk premium has been added, causing their yields to climb even more sharply. This has led to a steep rise in funding costs for SCFCs, and, coupled with shrinking investor demand, has further deteriorated their funding environment across the board. There are also growing concerns that this instability could spread throughout the entire credit market, including corporate bonds.

In reality, refinancing conditions for SCFCs have visibly worsened. The volume of SCFC bonds maturing this year reaches 57 trillion won, but due to market tightness, the burden of refinancing through re-issuance is rising. The structure has shifted so that companies, after repaying funds previously raised at just above 3% interest, must now borrow again at just above 4%, increasing their interest expenses. Since SCFCs rely on bond issuance for 60-70% of their overall funding, the shock is inevitably significant.

The deepening concentration in short-term bonds is also a problem. According to the Korea Financial Investment Association, the proportion of long-term SCFC bond issuance (maturities of three years or more) dropped from an average of 40.5% in January to 21.3% in February, and further down to 16.0% in March when the Middle East crisis erupted. Although it rebounded to 32.0% in April, volatility remains high. As interest rates have risen substantially compared to the past, repeated refinancing with short-term bonds is rapidly accumulating interest burdens and increasing refinancing risk. An official at a credit card company lamented, "With demand for long-term bonds virtually disappearing, most issuance is now focused on short-term bonds," adding, "It cannot be said that funding is stable."

Issuance data clearly show the worsening funding environment. Net SCFC bond issuance was negative for two consecutive months at the beginning of the year: -1.456 trillion won in January and -1.4692 trillion won in February, indicating net repayments. This suggests that SCFCs chose to endure by reducing borrowing rather than accepting high interest rates. Although net issuance turned positive in March (1.1072 trillion won) and April (1.3708 trillion won), the consensus is that this is due to unavoidable refinancing rather than improved market conditions.

The problem arises if this structure persists over the long term. While raising interest rates on card loans or merchant fees is difficult in the short run due to regulation and competition, funding costs continue to rise, causing profitability to stagnate. Furthermore, if refinancing through short-term bonds continues, the risk of a sudden increase in liquidity risk depending on future market conditions cannot be ruled out. As SCFC bond yields rise, so do the interest payments to financial institutions that buy them, and if asset quality deteriorates, financial institutions could experience spillover effects.

An industry insider warned, "With Middle East risk and other uncertainties unlikely to be resolved quickly, companies are currently just holding out with short-term bonds. If short-term bond issuance becomes blocked after long-term bonds, the market could enter a full-fledged liquidity crisis, making refinancing itself extremely difficult."

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