Purchased with support of 1.8 trillion won from the government
A vicious circle in business when corporate credit goes down
Although the government is pouring out countermeasures every day to relieve the financial market crunch, there is a prospect that a ‘second tsunami’ may come from the end of the year that can worsen the liquidity crisis situation. There are concerns that rocks are lurking everywhere, from the risk of insolvent small and medium-sized securities companies to business deterioration due to corporate credit rating downgrades.
According to the financial investment industry on the 13th, the total size of real estate project financing (PF) asset-backed commercial paper (ABCP) guaranteed by securities companies is 20.2867 trillion won. Among them, A2 grade ABCP guaranteed by small and medium-sized securities companies is KRW 1,522.6 billion, or KRW 1,124.4 billion, which accounts for 73.5%, is regarding to expire at the end of the year. Although the portion of the total PF ABCP is small, if a securities company fails to refinance, it will inevitably spread to the entire fund market. Accordingly, on the 11th, the financial authorities started to block the fire in advance through a liquidity supply support plan worth 1.8 trillion won, which preferentially purchases A2 grade ABCP guaranteed by small and medium-sized securities companies. The plan is to purchase A2 grade ABCP first, and to digest up to A1 grade ABCP if refinancing is difficult due to lack of liquidity in the capital market at the end of the year.
Nonetheless, it is not easy to resolve the financial market crunch in the short term. In fact, the credit spread, a measure of the risk of investing in corporate bonds, is recording a maximum every day, sounding an alarm. As of the 11th, the ‘AA-‘ grade 3-year unsecured corporate bond yield was 5.407% per year, recording a 157.4bp (1bp = 0.01%) interest rate difference with the 3-year government bond (3.833%). This is the highest since 159.3bp on April 28, 2009. The credit spread is the difference in interest rates between credit bonds and government bonds, and corporate credit risk increases as the spread widens.
Another concern is the possibility of a ‘massive downgrade’ when corporate credit ratings are readjusted at the end of the year. Credit rating agencies usually complete regular evaluations of corporate bond ratings by the end of June and commercial paper (CP) credit ratings by the end of December. After the current liquidity crisis is reflected at the end of this year, it is predicted that there will be a significant number of companies whose credit ratings will be downgraded next year. When a company’s credit rating is lowered, it has no choice but to issue corporate bonds or CP by offering higher interest rates to investors. An official from the financial investment industry said, “A credit rating downgrade increases the cost of financing for companies, which can lead to a vicious cycle in which the business situation worsens once more.”
Reporter Song Soo-yeon
