KDB may have to up debt issue to finance program to stabilize debt market

State lender Korea Development Bank (KDB) may have to issue debt despite advises of restraint to revive demand for corporate bonds as ironically, it inevitably has to turn to debt issue to finance the bond purchase program as a part of debt stabilization measures.

KDB has been buying commercial papers of brokerage issuers worth 2 trillion won ($1.4 billion) for its share of 10-trillion-won fund to stabilization the debt market rattled after a default declare by a public developer behind Legoland Korea.

Contrary to the government plea to public and financial institutions to refrain from new issues during the recovery period, KDB finds no other choice to finance the bond purchase program.

But KDB debt offering could upset the market of oversupply and low demand that has sapped appetite for corporate bonds to cause liquidity woes from mismatching in debt financing.

The policy bank does not have reserves from bank deposits like commercial lenders and would have to issue debt for financing.

“Debt makes up 70-80 percent of fundraising means, and we cannot act as the lender of last resort without issuing new debt,” said an unnamed KDB official.

Despite stabilization efforts, the corporate bond remains icy.

Korean companies last month raised 3.69 trillion won through debt issue while repaying 8.53 trillion won upon maturity, according to the Korea Financial Investment Association.

Issues by state-owned entities enjoying high investment grade as the Korean sovereign rating hit 6.21 trillion won last month while redemption stopped at 4.14 trillion won.

State-run utility firm KEPCO has been a regular visitor to the debt market due to mounting losses from spike in fuel cost.

Banks’ net issues reached 260 billion won, with new offerings also greater than redemption.

The spread between government and corporate bonds has widened to 1.439 percentage points Wednesday despite bond purchase by state entities including Bank of Korea.

by Kim Myung-hwan, Chae Jong-won and Lee Ha-yeon