[Donmaekgyeonghwa] Card and Capital Companies 'Cry for Help'... "New Loans Are Out of the Question"

Gangwon-do PF-ABCP Default Declaration Triggers Chain Reaction... Corporate Bonds and CPs Also Facing Liquidity Crunch

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] As the phenomenon of "financial arteriosclerosis," where market liquidity dries up, intensifies, credit finance companies such as card and capital companies are taking a direct hit. Since they lack deposit functions, they rely on the bond market for funding, but the issuance of corporate bonds, commercial papers (CP), and asset-backed securities (ABS) remains severely blocked. Industry experts advise that the government should ease the capital market crunch by expanding the Bond Market Stabilization Fund (채안펀드) currently under review.

According to the Bond Information Center of the Korea Financial Investment Association on the 21st, the net issuance amount (issuance amount minus redemption amount) of other financial bonds (card and capital bonds) was -2.4473 trillion KRW as of the previous day in October. This surpassed the total net issuance amount of -1.512 trillion KRW for all of September in less than 20 days. The net issuance of other financial bonds has steadily declined this year, with 5.2247 trillion KRW in Q1, 3.6894 trillion KRW in Q2, and 2.2555 trillion KRW in Q3. Although it was positive through Q3, it is expected to turn negative in Q4.

The reason for the negative net issuance of other financial bonds is attributed to the increasingly difficult funding environment. Since the beginning of the year, the base interest rate has surged and market conditions have worsened, causing institutional investors to flock to highly rated government and special bonds. The large-scale issuance of Korea Electric Power Corporation bonds (KEPCO bonds) since early this year is also cited as a cause. KEPCO bonds are generally treated like government bonds in the market. As of the previous day, the 3-year KEPCO bond yield was 5.712%, only 22 basis points (1bp=0.01%) lower than the 3-year AA+ rated credit finance bond yield of 5.937%.

As funding conditions tighten, credit finance bond yields are soaring. As of the previous day, the 3-year AA+ rated credit finance bond yield was 5.937%, up more than 350 basis points from 2.420% at the beginning of the year, approaching the 6% level. Meanwhile, 3-year AA- and A-rated bonds yielded 6.159% and 6.864%, respectively, surpassing 6%, and BBB-rated bonds reached 9.788%, nearing the 10% range.

With the bond market freezing, credit finance companies are diversifying funding sources through CP and ABS, but there are limits. The issuance of floating rate notes (FRN) has also increased significantly this year. According to Korea Credit Rating, the proportion of FRNs among card bonds issued rose nearly twofold from 24% in Q1 to 46% in Q2. Given that FRNs have interest rates that fluctuate with market rates, they are structurally disadvantageous to issuers during rising rate periods, but the difficulty in bond issuance has made this an unavoidable choice.

Industry insiders say the trigger for this financial arteriosclerosis was the default declaration on the Legoland-related project financing asset-backed commercial paper (PF-ABCP) in Gangwon Province. The spread of distrust even in government and local government guarantees has pushed the CP, corporate bond, and credit finance bond markets into a chain credit crisis. A senior official at a mid-sized credit finance company noted, "The default on ABCP guaranteed by local governments, which are effectively government guarantees, has significantly undermined market participants' trust."

In response, credit finance companies are halting new projects and focusing on risk management. A senior official at a top-tier card company said, "It is still manageable for now, but if bond yields rise further and refinancing becomes difficult, we will have no choice but to reduce credit sales by scaling back marketing." Capital companies, which have lower credit ratings than card companies, have already closed the door on new businesses due to dried-up funding. A senior official at a small-to-medium capital company said, "Most capital companies have effectively stopped new corporate and investment financing, and retail operations such as auto loans are being conducted on a limited basis. Large companies are also focusing on repayment management as refinancing becomes difficult."

Moreover, capital companies with a high proportion of real estate project financing (PF) loans are also facing crisis rumors for next year. The capital industry has recently been expanding its share in corporate finance (IB) and investment finance instead of core retail operations like auto loans, but a significant portion of this has been concentrated in real estate PF loans such as bridge loans. For example, as of the end of the first half of this year, the proportion of real estate PF loans in the total assets of capital companies with mid-to-low credit ratings reached 64.4%. The Bank of Korea noted in a previous report, "The average balance per real estate PF loan by capital companies reached 10.53 billion KRW as of the end of March, and if individual PF loans become distressed, the impact could be significant."

Experts advise that the government must step in to alleviate this financial arteriosclerosis to some extent. Professor Seo Ji-yong of Sangmyung University’s Department of Business Administration said, "As the authorities are considering activating the Bond Market Stabilization Fund (채안펀드) to prevent market tightening, if the fund purchases some credit finance bonds, it could somewhat improve the tight funding situation of credit finance companies."

The credit finance industry also sees the need for more active government intervention. A credit finance industry official said, "The currently announced 1.6 trillion KRW level is unlikely to ease the current financial arteriosclerosis. We believe it is necessary to quickly inject funds amounting to at least 5 to 6 trillion KRW to stabilize the market situation."