Purchased with the support of 1.8 trillion won from the government
A vicious circle in business when corporate credit falls
Although the government is taking countermeasures every day to alleviate the financial market crisis, there is the prospect that a “second tsunami” could arrive from the end of the year which could worsen the situation of the liquidity crisis. There are fears that rocks lurk everywhere, from the risk of default of 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 asset-backed commercial paper (ABCP) real estate project financing (PF) guaranteed by securities companies is 20.2867 trillion won. Among them, the A2-grade ABCP backed by small and medium-sized securities companies is KRW 1,522.6 billion, or KRW 1,124.4 billion, accounting for 73.5%, and is about to expire at the end of the year. While 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. As a result, on the 11th, the financial authorities began to stop the fire early through a liquidity support plan worth 1.8 trillion won, which preferentially buys A2 grade ABCP backed by small and medium-sized stocks. The plan is to buy A2 grade ABCP first and 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.
However, it is not easy to resolve the financial market crisis in the short term. In fact, the credit spread, a measure of the risk of investing in corporate bonds, is peaking every day, sounding an alarm. As of ’11, the yield on 3-year “AA-” grade unsecured corporate bonds was 5.407% per annum, recording an interest rate difference of 157.4 basis points (1 basis point = 0.01% ) compared to the 3-year government bond (3.833%). This is the highest since 159.3 basis points as of April 28, 2009. The credit spread is the difference in interest rates between debt and government bonds, and corporate credit risk increases as the spread increases.
Another concern is the possibility of a “massive downgrade” when corporate credit ratings are readjusted at the end of the year. Credit rating agencies typically complete periodic assessments of corporate bond ratings by the end of June and commercial paper (CP) ratings by the end of December. After the current liquidity crisis is reflected at the end of this year, it is expected that there will be a significant number of companies whose credit ratings will be downgraded next year. When a company’s credit rating is downgraded, it has no choice but to issue corporate bonds or CP offering higher interest rates to investors. A financial investment industry official said: “A credit rating downgrade increases the cost of financing for companies, which can lead to a vicious cycle in which the company’s situation deteriorates again.”
Reporter Song Soo-yeon
