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| Crowds of visitors watch an event at Legoland Korea in Chuncheon, Gangwon Province, in this May 5 file photo. Newsis |
Financial regulator to tap into bond market stabilization fund
By Anna J. Park
As uncertainties stemming from a default in project financing (PF) for the construction of a Legoland amusement park in Gangwon Province add to woes in the domestic bond market, Korea's top financial regulator said it will inject 1.6 trillion won ($1.1 billion) into the debt market, while ensuring additional liquidity to cover short-term loans.
The Financial Services Commission (FSC) announced Thursday that it will tap into the bond market stabilization fund to provide liquidity, as it inspects the cash levels of financial companies. The FSC said it also plans to temporarily ease banks' required liquidity coverage ratios (LCR).
"The FSC is closely monitoring the short-term fund market's increased volatility. In particular, it is thoroughly keeping track of risk factors related to Gangwon Province's PF asset-backed commercial paper (ABCP) issuance to take necessary measures so that it won't exacerbate the financial market's uncertainty," FSC Chairman Kim Joo-hyun said.
The FSC'S message comes as the Iwon Jeil Cha, a special purpose company established by a Gangwon Province-led developer, went into bankruptcy early this month. Since the bankruptcy, the local bond and commercial paper (CP) market has been subject to increasing jitters among investors, resulting in soaring interest rates for corporate bonds and CPs.
Back in 2020, Gangwon Jungdo Development Corp (GJC), an investment arm of Gangwon Province, established Iwon Jeil Cha to finance the construction of Legoland Korea, issuing ABCP worth 205 billion won.
The local government guaranteed the repayment of the commercial paper, but it did not pay the money when GJC failed to redeem the bonds. Instead, Gangwon Province decided to apply for corporate rehabilitation of GJC in late September, aiming to reduce the local government's debt burden. As a result, Iwon Jeil Cha became officially bankrupt in Oct. 4 by the Korea Financial Telecommunications & Clearings Institute.
As 10 securities firms, including Shinhan, IBK, Samsung, Mirae Asset and Daishin, as well as Mirae Asset Global Investments purchased all of the 205 billion won in ABCP issued by Iwon Jeil Cha, the bankruptcy not only harmed the companies' financial profits, but also sent further shockwaves to other local bonds associated with local governments' financing.
The aggregate size of ABCP issued after being guaranteed by local governments is estimated at around 1.3 trillion won nationwide. Normally, ABCP interest rates stood at around 4 percent until last month, but surged to the 10 percent range in just two weeks following the bankruptcy.
The increased risks also negatively affected the corporate bond and commercial paper markets. The interest rate of AA- rated three-year maturity corporate bonds rose to 5.574 percent earlier this week, while the commercial paper interest rate also reached 4.02 percent for the first time in 13 years.
Gangwon Province, meanwhile, reportedly plans to allocate a special budget next month to repay the entire ABCP by the end of January next year. As the corporate rehabilitation process is also currently ongoing, the local government hopes to repay the debt with the sale of GJC. But the local government once again vowed to follow through the guaranteed repayment, regardless of the result of the corporate rehabilitation procedure.
