‘Saechulbal Gigeum’ Facing Concentrated Fire... Funding Securing Also Full of Challenges

[Asia Economy Reporter Eunju Lee] Amid ongoing controversy over the ‘moral hazard’ surrounding the New Start Fund, the Korea Asset Management Corporation (KAMCO) faces significant challenges in securing the necessary resources. To smoothly proceed with the purchase of 30 trillion won worth of non-performing loans, it is essential to consider securing additional funding capacity through related legal amendments and managing the sharp rise in debt ratios due to the issuance of corporate bonds.

According to the Financial Services Commission on the 10th, KAMCO plans to raise 18 trillion won in operating funds for the New Start Fund (SPC) over three years. The 18 trillion won operating fund is a figure calculated by assuming an average purchase price of 60% for the non-performing or potentially non-performing loans (worth 30 trillion won) that KAMCO plans to acquire in the future.

The Financial Services Commission plans to secure the 18 trillion won through the budget approved by the National Assembly and by issuing KAMCO bonds (corporate bonds). First, the commission will secure 3.6 trillion won in total by combining the 1.1 trillion won budget secured through this year’s second supplementary budget and additional budget allocations from the National Assembly next year.

KAMCO plans to raise the remaining funds by issuing about 12 to 14 trillion won worth of corporate bonds (KAMCO bonds) on its own. Additionally, any budget shortfall is expected to be naturally covered over the next three years as borrowers repay their debts during the operation of the New Start Fund. In other words, aside from the government budget of 3.6 trillion won, most of the funds will be raised through debt.

There are considerable hurdles to overcome in this process. Above all, an amendment to the ‘Act on the Management of Korea Asset Management Corporation (KAMCO Act)’ is necessary. According to this law, KAMCO’s capital is capped at 3 trillion won, limiting the amount of funds KAMCO can raise. Currently, KAMCO’s capital stands at 2.7 trillion won, which includes the 1.1 trillion won allocated from the New Start Fund budget through this year’s second supplementary budget.

Therefore, at this point, the legally available additional budget for KAMCO is only 300 billion won. A Financial Services Commission official stated, “The ‘textbook’ solution to securing the budget is amending the relevant law,” adding, “If the legal capital limit for KAMCO is raised to 5.2 trillion won, it would be possible to secure additional budget from the National Assembly and inject funds.” The commission is also considering a plan for the National Assembly to directly contribute funds to the New Start Fund in case the law is not amended.

If the related law is not amended first, a sharp increase in KAMCO’s debt ratio is inevitable during the large-scale issuance of corporate bonds. KAMCO plans to raise funds by issuing about 12 to 14 trillion won worth of KAMCO bonds over three years, issuing approximately 4 trillion won annually, and then lending these funds to the New Start Fund. If the KAMCO Act is not amended and capital injections to KAMCO are blocked, it is analyzed that KAMCO’s debt ratio could rise to the 280% range by 2025.

Meanwhile, there are concerns that the supply and demand situation in the corporate bond market should also be taken into account, given that most funds will be raised through the issuance of corporate bonds (KAMCO bonds). This is due to the recent tightening of the corporate bond market amid continuous base rate hikes. The National Assembly Budget Office stated in its ‘Second Supplementary Budget Analysis Report’ earlier this year, “It is necessary to consider whether the required funds can be secured in a timely manner through large-scale issuance of corporate bonds under current market conditions, and whether such issuance could impact the corporate bond market.”