Seoul to up bond purchases and subsidize builders to contain liquidity crunch

FSC and FSS [Provided by Maekyung Media Group]

South Korea’s financial authorities are trotting out additional measures to ease liquidity crunch amid widening repercussions on the overall capital and property market.

According to multiple sources from the financial sector on Thursday, Financial Services Commission (FSC) and Financial Supervisory Service (FSS) will hold a meeting with policy lenders and financial institutions to expand purchases of secured short-term papers.

“The financial authority will introduce additional measures on Friday to stabilize fund market,” said an unnamed official from the financial industry. “The immediate action would go to the woes of asset-backed commercial papers (ABCP)s through purchases by special vehicle and Korea Development Bank,” he added.

Nine big brokerage firms including Mirae Asset Securities will each put up 50 billion won ($36.7 million) to create a special vehicle with a budget of 450 billion won this month to purchase ABCPs of small- and mid-size brokerages.

KDB which has launched a 10 trillion won bond purchase program has bought 2 trillion won CPs of brokerages and will expand the program to ABCP.

Brokerages have been running into liquidity crisis amid souring in project-related financing after the Legoland Korea-related municipal debt defaulted.

The 16th Spellbind ABCP guaranteed by DB Financial Investment yield went up as high as 20 percent in the over-the-counter bond market two days before maturity on Oct. 25.

ABCP is a commercial paper issued by a liquidity-focused special purpose company on guarantee of land and buildings that will be built in the future. Project financing ABCP, which was the case in Legoland default crisis, is retailed by a brokerage with three-month short maturity.

Authorities have been eagerly intervening to contain the liquidity woes.

Upon relief from parent group and insurance peers, Heungkuk Life Insurance has decided to exercise its call option for early payment of hybrid bonds. Shinhan Bank has also successfully issued 400 million Australian dollar worth of Kangaroo bonds.

Restored demand for ABCPs would help to smooth out the capital market flow.

The Ministry of Land, Infrastructure and Transport at the same time will subsidize 5 trillion won to builders due to increases in unsold apartment units Housing and Urban Guarantee Corporation (HUG) amid sluggish property market from rising interest rates. Builders are having trouble to complete constructions of apartments due to poor demand and capital.

By Pulse