Research Staff

Research Staff




A Regulatory Shift in Asset-backed Securities: Impact and Outlook / Jan. 02, 2024
Korea’s asset-based securities (ABS) market is divided into the registered and non-registered ABS markets, each exhibiting some differences in the regulatory system and market structure. The registered ABS market is constrained by strict regulatory procedures and has limitations in introducing innovative securitization structures and new assets for securitization. The non-registered ABS market has attempted to adopt ABS with various structures but struggles with low market transparency.In response, the Korean government has amended the Asset-backed Securitization Act and will put the amendment into force in January 2024, aiming for enhancing transparency in the ABS market and promoting the introduction of diverse securitization structures. This amendment includes measures to expand the scope of originators, allow for the introduction of new securitization structures such as the multi-seller structure and clarify the concept of ABS, in an effort to invigorate the ABS market. On the other hand, it also adopts stricter regulations related to ABS, including enhancing disclosure of issuance details for registered and non-registered ABS and introducing the risk retention system for originators. These regulatory improvements are expected to have positive effects, such as the relaxed eligibility for originators, the securitization of a range of assets, and the introduction of new securitization structures. Additionally, the overall transparency of the ABS market is likely to improve, thereby contributing to the healthy development of the market. In the meantime, the risk retention regulation is anticipated to have a limited impact on the market, due to its relatively flexible approach. For the benefits of these improvements to be effectively realized, market participants should strive to boost the ABS market by issuing ABS based on various underlying assets and to enhance transparency for the development of the ABS market.
Changes in Corporate Debt Structure in Response to Rising Interest Rates / Jun. 13, 2023
Amid rising market interest rates and changes in the funding market environment, the financing structure of listed companies has become diversified. As the yield of corporate bond issuance has shot up due to the increase in real interest rates, listed companies are increasing their reliance on financing alternatives while curtailing corporate bond issuance. Although the financing structure of listed companies has become more flexible in response to the rise in interest rates, the financing cost for listed companies climbed in 2022 on a YoY basis. However, as rate hikes primarily affect newly raised funds, the increase in financing costs for listed companies is smaller than the rise in real interest rates. Furthermore, the difference in financing structure and credit ratings has made the increase in financing costs vary by market and company size. Meanwhile, corporate financial soundness has been undermined by a higher financing cost and lower profitability resulting from the economic slowdown. If interest rates keep rising further, listed companies may have to cope with higher interest expenses and worsening financial conditions, due to an additional interest burden from rollover. Fortunately, interest rates have recently stabilized, easing concerns about a spike in corporate credit risk posed by rising interest rates. Considering lingering inflationary pressures and risk factors lurking in the money market, however, it seems hard to expect corporate financing conditions to show signs of drastic improvement. Accordingly, efforts should be exerted to proactively respond to the potential risks in the funding market, keep corporate financing costs down, and enhance corporate fundamentals.
How the Corporate Bond Market Changes in Rate Hike Cycles / May. 17, 2022
Recently, a sharp increase in the market interest rate has dwarfed the corporate bond market. The supply and demand imbalance of credit bonds has widened credit spreads, driving up financing costs through corporate bond issuance. In particular, Korea’s corporate bond market has seen the yield on issuance climbing and maturities getting shorter amid rising market interest rates since the second half of 2021. The impact of the upward trend in market interest rates varies by bond type. It tends to have a relatively limited impact on public placement bonds, while private placement bonds are faced with a sizable increase in financing costs and shorter maturities due to rate hikes. Looking forward, the market interest rate is likely to climb further, underpinned by changes in internal and external financial conditions. As the market for public placement bonds acts as a source of financing for companies with relatively strong credit quality, its exposure to rising interest rates would be limited. In addition, an increase in interest rates below a certain level is less likely to affect directly their financial performance. On the other hand, private placement bonds are used for financing by companies with lower ratings and thus, would be likely swayed by rate hikes. In this regard, what is needed is to step up management efforts for the sectors with poor credit quality in response to changing interest rates. Also necessary is to examine how changing conditions in Korea and abroad such as rising interest rates would influence the entire economy including the production and export sectors and to strengthen economic fundamentals.
Rising Credit Risk in China’s Corporate Bond Market: Background and Implications / Nov. 23, 2021
The default risk of China Evergrande Group, one of China’s real estate giants, is raising concerns over the corporate bond market in China. Having emerged as the largest in Asia, China’s corporate bond market has grown thanks to the government policy for nurturing the market and the greater demand of firms and financial institutions for funding. However, some firms have defaulted on corporate bonds since 2015 amid growth of the credit bond market. In 2018, an increasing number of privately owned firms began to default on bond payments, and 2020 saw a rise in defaults of state-owned enterprises. The surge in corporate bond defaults can be attributed to regulatory measures for curtailing shadow finance and the government’s greater tolerance towards defaults. As higher leverage arises from firms pursuing borrowing-based growth, such a regulatory shift has affected credit ratings in the corporate bond market. In addition to a large proportion of property-backed bonds in the market lacking advanced credit rating infrastructure, the policy to curb real estate prices serves as another factor behind the China Evergrande Group fiasco, further raising the possibility of other property firms’ bankruptcy. Nevertheless, the ratio of defaulted bonds to China’s total corporate bond issuance amount remains low. Except for a few business categories, the overall conditions in the credit bond market show signs of improvement, which could lower concerns over the spread of systemic risks arising from a series of massive defaults. Furthermore, most corporate bonds are held by domestic investors and thus, bond defaults are likely to have a limited impact on overseas investors. However, greater credit risk posed by a growing number of firms going bankrupt could deteriorate the soundness of China’s financial institutions, potentially having an adverse impact on other economies.