Korean Inc. desperately turns to short-dated CPs on deepening liquidity squeeze

South Korean authorities will reduce new treasury issues and facilitate funding to brokerage houses in desperate measures to revive the destabilized debt market that has turned companies big and small and financial institutions to seek short-term financing to sustain operations.

According to Korea Securities Depository, commercial papers including asset-backed papers due in six months or less amounted to 233.46 trillion won ($163 billion). That much of a financial risk has risen should liquidity squeeze deepen and prolong.

The balance in CPs stood at 237.4 trillion won as of October, off 1.3 trillion won from January. But short-dated papers reached 76.9 trillion won, surging 13.4 trillion won from January.

Specifically, the balance in asset-backed single transaction bond (STB) to finance one-time transaction spiked 42 percent on year to 49.36 trillion won, whereas overall asset-backed commercial papers fell 17.22 percent on year.

Turning to bonds dated less than six months suggests that much of emergency and difficulty in raising funds.

Due to the rising demand, the yield in short-dated bonds has been soaring.

Short-dated A3 bond yield went up to 7 percent this week.

When bonds maturing three to six months cannot be covered through new financing, chain default crisis may be inevitable.

“Denial of rollovers due to the risk in default is worsening the situation,” said a securities trader at a brokerage house. The rate increases in the U.S. would last through the first half next year, and by then projecting financing could sour in chain, he added.

Korean financial authorities moved faster with 50 trillion won ($35 billion) relief package, sensing the danger.

The Financial Services Commission has ordered Korea Securities Finance Corp. to immediately dole out 3 trillion won to brokerage houses faced with immediate liquidity shortage.

The state firms will provide funds through repurchase agreements and collateralized loans. Collateral could include investment-grade corporate bonds and commercial papers along with traditional government and bank issues.

The government meanwhile would “radically reduce” government bond issues to help ease oversupply and channel demand to corporate bonds, said Deputy Prime Minister and Finance Minister Choo Kyung-ho in a bond conference held on Tuesday.

Government bond ceiling for this year has been set at 117.3 trillion won, of which 144.2 trillion won worth has been issued.

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