Korea Credit Guarantee Fund to Directly Issue P-CBOs Next Year... Corporate Interest Burden to Drop by About 50bp

Amendment to the Enforcement Decree of the Korea Credit Guarantee Fund Act Takes Effect on October 2
First Trust-Based Issuance Planned for the First Half of Next Year After Preparatory Procedures

The Korea Credit Guarantee Fund plans to directly issue securitization guarantees (P-CBO) for the first time in the first half of next year. By issuing through a trust structure, companies are expected to see their interest burden reduced by about 50 basis points (1bp=0.01 percentage point) compared to the existing special purpose company (SPC) method, thanks to savings on various fees.

The Financial Services Commission announced on October 1 that, starting from October 2, amendments to the "Korea Credit Guarantee Fund Act" and its enforcement decree will take effect, allowing the Korea Credit Guarantee Fund to directly issue P-CBOs through a trust structure.

P-CBO is a corporate support and market stabilization system that pools corporate bonds from companies that have difficulty issuing bonds on their own due to low credit ratings, and enables them to issue bonds by having the Korea Credit Guarantee Fund provide a full payment guarantee for senior securities. Since its introduction in July 2000, it has supported the issuance of corporate bonds worth 74 trillion won for about 10,000 companies.

Previously, the Korea Credit Guarantee Fund Act only stipulated that P-CBOs be issued through the establishment of an SPC. Under the SPC method, various fees must be paid to banks and securities firms by appointing separate asset managers, trustees, and lead managers in accordance with the "Asset-Backed Securitization Act" when issuing P-CBOs. In addition, the securitized securities issued by SPCs are classified as general corporate bonds, which results in relatively higher interest rates.

The Financial Services Commission explained, "If the Korea Credit Guarantee Fund establishes its own trust account and directly issues P-CBOs through the trust method, the various fees that were previously paid will be reduced, and P-CBOs will be recognized as special bonds," adding, "Interest rates will be lowered, resulting in cost savings of about 50 basis points per company."

The Korea Credit Guarantee Fund plans to prepare the necessary standards and IT infrastructure so that the cost burden for companies using P-CBOs can be alleviated as soon as possible, and aims to issue the first trust-based P-CBO in the first half of next year.

In addition, since the system is still in its early stages, both the SPC and trust methods will be used in parallel for the time being. However, the Korea Credit Guarantee Fund plans to fully transition to the trust method as soon as possible so that more companies can benefit from reduced costs.