The FSC announced preemptive market stability measures on July 13 to help stabilize corporate money markets amid rising volatility in the corporate bond and CP markets and financing difficulties exhibited by some businesses due to the impact of recent market rate increases. The Korea Development Bank (KDB) and Korea Credit Guarantee Fund (KODIT)’s operation of the corporate bond and CP purchase programs will be extended until March 2023 and the maximum purchase cap will be expanded to KRW6 trillion.
Corporate Bond and CP Market Assessment
The FSC along with the Financial Supervisory Service, other relevant institutions and market participants has been closely monitoring the corporate bond and CP markets amid concerns over increasing volatility in the corporate bond and CP markets due to recent rate hikes.
Current Situation in Corporate Bond and CP Markets
Due to deteriorating conditions for issuing corporate debt amid expansions in interest rates and spreads, there have been concerns about a slowdown in the issuance of corporate debt and risk for refinancing particularly for low-rated and vulnerable businesses.
I. Corporate Bond Market Situation
(Issuance) In H1 2022, the amount of corporate bonds (for both non-financial and financial businesses) issued was KRW89.3 trillion, a decline from the same period in the previous year, and the trend for low-rated (non-investment grade) businesses (A-rating or lower) has been continuously declining since March.
(Interest Rate and Spread) With acceleration in monetary tightening by major economies and continuing rate hikes by the Bank of Korea, the issuing rates have increased and spreads have expanded too. Especially, corporate bond spreads in general have recently gone up higher than the highest point recorded during the COVID-19 pandemic era (June 2020).
(Refinancing Risk) Corporate bonds (non-financial businesses) maturing in H2 2022 amount to KRW15.4 trillion, which is the largest since 2017, and the proportion of non-investment grade (A-rating or lower) bonds stands at 39.6 percent (or KRW6.1 trillion). Especially, refinancing periods for non-investment grade (A-rating or lower) bonds are heavily concentrated in July (KRW1.8 trillion) and October (KRW2.1 trillion), which raises potential difficulties of issuing refinancing bonds if rate hikes continue.
II. CP Market Situation
(Interest Rate and Spread) The 91-day, A1-rated CP rate has increased from 1.58 percent in January 2022 to 2.36 percent on July 11 and the spread has expanded as well, weakening conditions for corporate financing.
(Issuance) With the maturity of CPs being issued becomes shortened as more businesses issue shorter-term maturity CPs and as there is a slight increase in the issuance of investment-grade CPs, the business financing conditions have been made more difficult for low-rated (non-investment grade) and vulnerable businesses.
⇒ If the corporate bond market conditions deteriorate further in H2 2022, market demand may shift toward CP and short-term debt, which raises concerns about expanding volatility in the short-term money markets.
Corporate Bond and CP Market Support Measures: Expanding Support for Low-rated (non-investment grade) Businesses
Key measures include (a) extending the operating period of the corporate bond and CP purchase programs run by the KDB and IBK until the end of March 2023 and (b) pursue additional purchase of up to KRW6.0 trillion in low-rated (non-investment grade) corporate bonds and CPs using the corporate bond and CP purchase programs.
I. Current Operation Status
The corporate bond and CP purchase programs operated by the state-backed financial institutions have been introduced in March 2020 in response to growing risks to the corporate bond market in the wake of the COVID-19 pandemic. The programs have been purchasing corporate bonds and CPs of diverse ratings to help alleviate liquidity shortage in the bond market and facilitate issuance of low-rated (non-investment grade) corporate bonds and CPs whose financing conditions have been hit the most by the pandemic. The programs’ purchase cap was set at KRW7.1 trillion in total, and as of the end of June 2022, KRW3.5 trillion in purchases have been made.
II. Details of Program Reorganization
(a) Purchasing period extension
The operating period of the four corporate bond and CP purchase programs was initially set until the end of September (end-December for quick corporate bond takeover program) this year. However, in order to be prepared for continuing uncertainties in the corporate bond market amid rate hikes, the purchasing period for all programs will be extended until March 30, 2023.
(b) Program integration and upward revision of purchase target
Currently, the four corporate bond and CP purchase programs are operated with a separate cap on each program, which makes it difficult to manage purchase caps more flexibly. As such, from now on, the four programs will be managed in an integrated way to allow quick purchases of assets (corporate bonds or CPs based on market demand) according to market conditions. The credit rating eligibilities for the integrated purchase program will be unified under the broader eligibility standard offered by the existing program to allow a more comprehensive purchase across both investment-grade and non-investment grade debt instruments. In addition, the purchase target will be expanded to make additional purchases of up to KRW6.0 trillion, making use of KRW3.6 trillion in the remaining portion of the purchase cap and KRW2.4 trillion redeemed from previous purchases.
The revised support measures for the corporate bond and CP purchase programs will go into effect immediately. The financial authorities will continue to maintain close monitoring of the corporate bond and CP markets through regularly held financial risk response taskforce meetings (monthly) and joint financial market review meetings (weekly). Authorities will also work on prompt implementation of additional measures depending on market situations when deemed necessary.
* Please refer to the attached PDF for details.