Seoul lenders of last resort expediting aid as insures also shun debt market

(Updated with BOK measures, Gangwon government announcement)

Korean central bank and policy lenders embarked on liquidity aid program as insurers – the most influential institution after public funds on the capital market – have dumped nearly 2 trillion won ($1.4 billion) in Korean bonds this month to cover losses from plunging bond prices to worsen the down spiral in the Korean debt market.

Insurers – who mostly invest in long-term bonds - net bought 91.6 billion won in September, but turned to net sellers in October as free fall in bond prices accelerated from Legoland crisis on top of fast rate increases by central banks in Korea and the U.S.

Their movement was in sync with brokerages and asset managers that offloaded bond holdings to prevent losses from sharp rise in yields. Bond prices move in the opposite direction of yields. Bond prices have rising toward historic highs this month.

Insurers who are usually most liquidity safe are also running short of funds amid reduced premium revenue due to stagnation in income and hardship from rises in inflation and interest rates. They have not been able to shed property assets due to sluggish property market.

Insurers are in a rush to bolster capital ratio ahead of the new International Financial Reporting Standards (IFRS 17) in January.

The dumping by insurers have devastated public enterprises as they are the biggest buyers of their debt that are usually issued over a long-term maturity.

¡°Public bonds are usually bought 60 percent by insurers and 10 percent by pension funds. The loss of insurers has led to poor demand for public issues,¡± according to an official from a public enterprise.

A number of issues offered by public enterprises including Korea Gas Corp. this month had been undersubscribed.

Pensions are chipping in to compensate for the loss of insurers to prop up the market.

Pensions including NPS net bought 3.26 trillion won in bonds this month as of Tuesday and 327.5 billion won last month. Pensions purchased bonds every day in October except for two days.

But they alone cannot buttress the wintry market.

Public institution Korea Airports Corporation rated AAA issued a three-year bond at 191 basis point over the government bond of same maturity.

According to KIS Pricing, 70.5 billion won in A-rated corporate bonds were circulated between Oct. 14 and 20 on over-the-counter market, down 57.7 percent from 166 billion won in the previous week between Oct. 7 and 13.

Circulation of higher-grade AAA and AA bonds, on the other hand, rose 19 percent and 139 percent respectively during the same period.

How much demand would revive by the government¡¯s proposal of 50 trillion won in liquidity aid including bond buyback program could be determined by upcoming auction.

Kyobo Securities rated AA- is offering 120 billion won in one-year maturity bonds and 30 billion won in 1.5-year maturity. Tongyeong Eco Power, a joint venture between HDC and Hanwha Group, will also hold a book building session on Thursday for 51 billion won bond sale.

Authorities are hastening to restore confidence in the debt market ruined by the default of a public debt related to Legoland Korea project.

Bank of Korea after a monetary policy meeting on Thursday agreed to temporarily include bank and public debt as collateral for short-term bank loans. Currently central bank accepts just government debt as collateral for loans to banks at the overnight base rate of 3 percent. The move can aid their liquidity for corporate bond lending and bond purchases while reducing the need for issue in new debt to aid the overall debt market supply condition.

The central bank will also enter repurchase (repo) agreement with hard-up brokerages worth 6 trillion won and include bank and public debt as collateral on top of traditional government bonds.

Since the repo operation is restricted to 6 trillion won for 91-day papers, the move does not go against overall monetary tightening, the bank added in a statement.

Korea Securities Finance Corp. on Wednesday also expedited 3 trillion won liquidity aid for brokerages. Korea Development Bank will also begin purchase of commercial papers issued by brokerages.

Meanwhile, Gangwon provincial government announced Thursday that it would fully repay 205 billion won defaulted by an umbrella developer overseeing Legoland Korea in Chuncheon by Dec. 15.

[¨Ï Maeil Business Newspaper & mk.co.kr, All rights reserved]