[THE INVESTOR] Korea Development Bank will spend as much as 500 billion won to buy corporate bonds rated “A” or lower, as part of measures to support smaller companies with cash needs to sell new bonds more easily. 

"Demand in Korea’s corporate debt market has been focused on large companies and their low-risk debt,” the Financial Services Commission said in a statement. 

“The announced measures are intended at supporting demand for lower-rate debt, so that more companies can raise funds through the market,” it said. 

According to the regulator’s announcement, the state-run KDB will set up a special-purpose company for the bond purchase program. Only unsold debt rated “BBB” to “A” and floated by small and medium-sized companies will be considered for the program. The purchase amount will not exceed 30 percent of the bond’s total issuance.

For debt rated below investment grade, the FSC will have the state-run Korea Credit Guarantee Fund providing guarantees on primary collateralized bond obligations worth 1.4 trillion won in the next two years.

This program, which is in addition to the KODIT’s ongoing P-CBO guarantee program, aims to support companies facing difficulties in debt financing due to low credit ratings.

The regulator will allow companies to issue bonds using their account receivables and intellectual properties as collateral.

KDB and the state-run Industrial Bank of Korea will launch a 100 billion-won fund that will invest in such bonds after the valuation of their intellectual properties.

Private equity firms will be allowed to provide direct financing to smaller businesses, the FSC said. Currently PEFs are allowed to make equity investments only.

Under the private debt fund plan, PEFs may offer loans and later become shareholders of the companies.

Korea’s corporate debt market is increasingly polarized, as demand is focused on highest-rated bonds amid worries over corporate restructuring.

In May, “AAA”-rated bond issuance reached 1.13 trillion won in May, up 162.7 percent from a month earlier. But “AA”-rated bond sales tumbled 46 percent to 1.71 trillion won.

Floatation of “A”-rated and “BBB”-rated bonds reached 320 billion won and 285 billion won each in May, down 56.4 percent and 12.3 percent respectively from the previous month.

By Lee Sun-young(milaya@heraldcorp.com)