"Possibility of Worsening CP Issuance in Vulnerable Industries if Real Estate PF Defaults Expand"

Bank of Korea, Financial Stability Report

[Asia Economy Reporter Seo So-jeong] Although the short-term financial market instability triggered by the Legoland incident is gradually calming down due to the government's market stabilization policies, there is an analysis that if concerns over real estate project financing (PF) defaults increase in the future, the issuance of PF-asset-backed commercial paper (ABCP), securities firms' CP, and CP from vulnerable industries may deteriorate again.

According to the Financial Stability Report released by the Bank of Korea on the 22nd, although the rise in CP interest rates has gradually narrowed due to recent government market stabilization efforts, the CP interest rates have not turned downward as a high level of credit caution persists. In particular, investment sentiment recovery is delayed in securities firms' specific money trusts, wrap accounts, and general money market funds (MMFs), which are major investors in CP, leading to continued capital outflows.

The spread compared to Monetary Stabilization Bonds (91-day maturity, average interest rate) reached a peak of 228 basis points on the 2nd of this month, up from 50 basis points at the end of September.

CP issuance saw large-scale net redemptions centered on PF-ABCP and securities firms' CP in October, but the scale of net redemptions has decreased since last month, supported by the full-scale execution of policy funds.

Last month, securities firms' and credit finance companies' CP switched to net issuance, whereas ABCP experienced significant net redemptions of time deposit ABCP, and PF-ABCP continued a net redemption trend due to ongoing refinancing difficulties.

CP issuance interest rates have stopped rising and are generally stabilizing following market stabilization measures. The issuance interest rates for securities firms' CP and PF-ABCP remained at high levels in the late 5% and late 7% ranges respectively last month, exerting upward pressure on CP interest rates (91-day final quoted yield).

With the government's market stabilization measures gradually restoring the CP market's funding function from late October, refinancing conditions for CP issuance have somewhat improved. However, there is a seasonal high possibility of large-scale capital outflows from MMFs and securities firms' specific money trusts toward the end of the year, which could increase refinancing risks for CP.

The Bank of Korea emphasized, "If concerns over real estate PF defaults increase in the future, the issuance and refinancing conditions of PF-ABCP, securities firms' CP, and CP from vulnerable industries may deteriorate further. It is necessary to faithfully implement the announced stabilization measures to stabilize the short-term financial market and prepare additional measures promptly if market conditions worsen."